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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-28030
i2 TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2294945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE i2 PLACE 75234
11701 LUNA ROAD (Zip code)
DALLAS, TEXAS
(Address of principal executive offices)
(469) 357-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2001 the Registrant had 420,915,449 shares of $0.00025
par value Common Stock outstanding.
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i2 TECHNOLOGIES, INC.
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets....................... 3
Condensed Consolidated Statements of Operations............. 4
Condensed Consolidated Statements of Cash Flows............. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 18
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 38
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 39
Item 2. Changes in Securities and Use of Proceeds................... 39
Item 3. Defaults upon Senior Securities............................. 39
Item 4. Submission of Matters to a Vote of Security Holders......... 39
Item 5. Other Information........................................... 39
Item 6. Exhibits and Reports on Form 8-K............................ 40
SIGNATURES........................................................... 41
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PAR VALUE)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 553,792 $ 739,241
Short-term investments.................................... 211,636 84,086
Accounts receivable, net of allowance for doubtful
accounts of $64,445 and $31,329........................ 182,730 298,465
Deferred income taxes, prepaids and other current
assets................................................. 97,628 76,989
----------- -----------
Total current assets.............................. 1,045,786 1,198,781
Premises and equipment, net................................. 152,013 124,852
Deferred income taxes and other assets...................... 558,589 410,026
Intangibles and goodwill, net............................... 620,596 7,492,167
----------- -----------
Total assets...................................... $ 2,376,984 $ 9,225,826
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 44,147 $ 49,628
Accrued liabilities....................................... 208,370 111,739
Accrued compensation and related expenses................. 95,461 84,942
Deferred revenue.......................................... 161,772 165,689
Income taxes payable...................................... 10,019 10,056
----------- -----------
Total current liabilities......................... 519,769 422,054
Other long-term liabilities................................. 175 325
Long-term debt.............................................. 410,930 350,000
----------- -----------
Total liabilities................................. 930,874 772,379
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000 shares
authorized, none issued................................ -- --
Common stock, $0.00025 par value, 2,000,000 shares
authorized, 420,381 and 405,840 shares issued and
outstanding............................................ 105 102
Additional paid-in capital................................ 10,325,575 10,174,012
Accumulated other comprehensive loss...................... (4,231) (6,694)
Accumulated deficit....................................... (8,875,339) (1,713,973)
----------- -----------
Total stockholders' equity........................ 1,446,110 8,453,447
----------- -----------
Total liabilities and stockholders' equity........ $ 2,376,984 $ 9,225,826
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2001 2000 2001 2000
----------- ---------- ----------- -----------
Revenues:
Software licenses....................... $ 67,997 $ 201,623 $ 384,955 $ 465,451
Services................................ 75,175 77,098 251,374 184,451
Maintenance............................. 50,953 40,802 155,339 98,521
----------- ---------- ----------- -----------
Total revenues.................. 194,125 319,523 791,668 748,423
Costs and expenses:
Cost of revenues:
Cost of software licenses............ 11,693 18,961 51,920 34,706
Amortization of acquired
technology......................... 13,757 11,368 38,924 16,703
Cost of services and maintenance..... 68,407 67,000 236,167 156,256
Sales and marketing..................... 106,540 110,852 393,146 262,655
Research and development................ 69,675 60,967 216,282 152,005
General and administrative.............. 26,087 22,947 83,744 60,458
Amortization of intangibles............. 763,630 760,739 2,282,938 964,351
In-process research and development and
acquisition-related expenses......... 8,000 2,796 12,700 102,115
Impairment of intangibles............... 4,740,519 -- 4,740,519 --
Restructuring charges................... 22,465 -- 55,465 --
----------- ---------- ----------- -----------
Total costs and expenses........ 5,830,773 1,055,630 8,111,805 1,749,249
----------- ---------- ----------- -----------
Operating loss............................ (5,636,648) (736,107) (7,320,137) (1,000,826)
Other income (expense), net............... (43,706) 7,216 (59,513) 13,928
Non-cash settlement....................... -- (22,412) -- (22,412)
----------- ---------- ----------- -----------
Loss before income taxes.................. (5,680,354) (751,303) (7,379,650) (1,009,310)
Provision (benefit) for income taxes...... (154,025) 4,408 (218,296) 15,476
----------- ---------- ----------- -----------
Net loss.................................. $(5,526,329) $ (755,711) $(7,161,354) $(1,024,786)
=========== ========== =========== ===========
Basic and diluted loss per common share:
Basic loss per common share............. $ (13.25) $ (1.91) $ (17.41) $ (2.94)
Diluted loss per common share........... $ (13.25) $ (1.91) $ (17.41) $ (2.94)
Weighted-average common shares
outstanding............................. 417,126 395,080 411,354 349,116
Weighted-average diluted common shares
outstanding............................. 417,126 395,080 411,354 349,116
Comprehensive loss:
Net loss................................ $(5,526,329) $ (755,711) $(7,161,354) $(1,024,786)
Other comprehensive income (loss):
Unrealized gain (loss) on
available-for-sale securities
arising during the period.......... (32,527) 877 (61,823) 877
Reclassification adjustment for net
realized losses on
available-for-sale securities
included in net loss............... 45,169 635 69,079 635
----------- ---------- ----------- -----------
Net unrealized gain............. 12,642 1,512 7,256 1,512
Foreign currency translation
adjustments........................ 2,738 (1,717) (2,090) (2,569)
Tax effect of other comprehensive
income (loss)...................... (4,551) -- (2,703) --
----------- ---------- ----------- -----------
Total other comprehensive income
(loss)........................ 10,829 (205) 2,463 (1,057)
----------- ---------- ----------- -----------
Total comprehensive loss........ $(5,515,500) $ (755,916) $(7,158,891) $(1,025,843)
=========== ========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(7,161,354) $(1,024,786)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Write-off of in-process research and development........ 12,700 101,174
Depreciation and amortization........................... 2,358,182 1,001,501
Impairment of intangibles............................... 4,740,519 --
Provision for bad debts charged to costs and expenses... 65,953 9,687
Amortization of deferred compensation................... 1,501 3,182
Non-cash settlement..................................... -- 22,412
Loss on equity investments.............................. 69,079 635
Loss on assets disposed in restructuring................ 10,501 --
Deferred income taxes and disqualifying dispositions.... (276,479) (124,850)
Tax benefit from stock option exercises................. 48,081 123,831
Changes in operating assets and liabilities:
Accounts receivable, net.............................. 53,750 (85,118)
Prepaids and other assets............................. 30,281 (39,860)
Accounts payable...................................... (10,730) 17,369
Accrued liabilities................................... 67,021 25,878
Accrued compensation and related expenses............. 5,707 33,636
Deferred revenue...................................... (14,889) 60,753
Income taxes payable.................................. 190 (1,021)
----------- -----------
Net cash provided by operating activities.......... 13 124,423
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired in purchase of RightWorks............... 1,041 --
Net cash paid in purchase of Trade Service Corporation and
ec-Content.............................................. (4,745) --
Net cash acquired in purchase of Aspect Development....... -- 55,206
Net cash acquired in purchase of SupplyBase............... -- 26
Direct costs of purchase transactions..................... (2,501) (23,895)
Short-term loan to RightWorks prior to acquisition........ (28,636) --
Long-term investments..................................... -- (910)
Purchases of premises and equipment....................... (53,661) (58,471)
Net change in short-term investments...................... (84,430) (75,839)
Purchases of equity investments........................... (5,000) (37,962)
Proceeds from sales of equity investments................. 1,083 1,394
Return of capital received on equity investment........... 714 --
Purchases of long-term debt securities.................... (35,169) (6,000)
----------- -----------
Net cash used in investing activities.............. (211,304) (146,451)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note acquired in acquisition of Trade Service
Corporation and
ec-Content.............................................. (24,698) --
Net proceeds from sale of common stock to employees and
exercise of stock options............................... 50,799 72,501
----------- -----------
Net cash provided by financing activities.......... 26,101 72,501
----------- -----------
Effect of exchange rates on cash.......................... (259) (318)
Net change in cash and cash equivalents..................... (185,449) 50,155
Cash and cash equivalents at beginning of period............ 739,241 454,585
----------- -----------
Cash and cash equivalents at end of period.................. $ 553,792 $ 504,740
=========== ===========
Supplemental disclosures:
Cash paid for interest.................................... $ 9,286 $ 9,479
Cash paid for taxes....................................... 4,189 2,353
See accompanying notes to condensed consolidated financial statements.
5
i2 TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(TABLE DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying condensed consolidated financial
statements have been prepared without audit and reflect all adjustments that, in
the opinion of management, are necessary to present fairly our financial
position as of September 30, 2001, and our results of operations and cash flows
for the periods presented. All such adjustments are normal and recurring in
nature. The accompanying condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q as prescribed by the
Securities and Exchange Commission (SEC) and, therefore, do not purport to
contain all necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the circumstances,
and should be read in conjunction with our consolidated financial statements,
and notes thereto, for the year ended December 31, 2000, included in our annual
report on Form 10-K/A filed with the SEC on August 7, 2001 (the "2000 Form
10-K/A"). Refer to our accounting policies described in the notes to financial
statements contained in the 2000 Form 10-K/A which we consistently followed in
preparing this Form 10-Q. Operating results for the three and nine months ended
September 30, 2001 are not necessarily indicative of the results for the year
ending December 31, 2001 or any future period.
Nature of Operations. We are a leading provider of dynamic value chain
software solutions that may be used by enterprises to optimize business
processes both internally and among trading partners. Our solutions are designed
to help enterprises improve efficiencies, collaborate with suppliers and
customers, respond to market demands and engage in dynamic business interactions
over the Internet. Our products are designed to help customers, partners,
suppliers and service providers conduct business together and offer a technology
infrastructure supporting collaboration, commerce and content. Our product
suites include software solutions for supply chain management, supplier
relationship management and customer relationship management. We also provide
content and content management solutions as well as a platform for integration
and administration of private and public electronic marketplaces. Our product
suites may be used by our customers to align their value chain to serve their
customers. We also provide services such as consulting, training and maintenance
in support of these offerings.
Principles of Consolidation. The condensed consolidated financial
statements include the accounts of i2 Technologies, Inc. and its majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
All prior share and per share data reflect the two-for-one stock split of
our common stock paid as a 100% stock dividend on December 5, 2000.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications. Some items in prior year financial statements have been
reclassified to conform to the current year presentation.
2. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
RIGHTWORKS
On August 22, 2001, we completed our acquisition of RightWorks Corporation,
a developer of software that is designed to enable companies to manage
procurement activities across multiple enterprises for both direct and indirect
materials, and support corporate buying models. We purchased all the outstanding
shares of RightWorks for approximately $40.2 million. The total purchase price
includes $38.8 million of our common stock (5.4 million shares), stock warrants
and restricted stock; approximately $14.9 million in acquisition-related costs
primarily for professional fees; and $1.5 million related to our relinquishing a
prior investment in RightWorks. Offsetting these items, in connection with the
acquisition, we were assigned a $14.0 million
6
promissory note and approximately $1.0 million in accrued interest payable by
RightWorks to Internet Capital Group, Inc., the majority shareholder of
RightWorks prior to our acquisition. This acquisition was accounted for as a
purchase business combination; accordingly, the results of operations of
RightWorks have been included with our results of operations since August 22,
2001.
On March 28, 2001, we entered into a loan and security agreement with
RightWorks whereby we agreed to loan them up to $25.0 million to provide
operating capital until our acquisition was closed. The credit limit was
subsequently increased to $40.0 million. The loan is secured by substantially
all of the assets of RightWorks. Principal and interest, accrued at a rate of
15.0% per annum, are due upon the termination of the loan agreement, which is
the date we demand payment. As of August 22, 2001, the date of our acquisition
of RightWorks, the outstanding principal balance of the loan was $28.6 million
and accrued interest totaled $1.0 million. No subsequent cash fundings will be
made in connection with this loan and security agreement. On August 22, 2001,
the principal balance and accrued interest related to the loan were reclassified
as intercompany balances that are eliminated in consolidation.
The total purchase price paid for the acquisition was allocated based on
the estimated fair values of the assets acquired as follows:
Net liabilities assumed..................................... $(60,379)
Developed technology intangible asset....................... 35,938
Goodwill.................................................... 56,624
In-process research and development......................... 8,000
--------
Total............................................. $ 40,183
========
The developed technology intangible asset is being amortized over three
years. In accordance with a new accounting standard effective for acquisitions
closed after June 30, 2001, the goodwill recognized in this acquisition will not
be amortized. See Note 12 -- New Accounting Standards.
In connection with our acquisition of RightWorks, $8.0 million, or 19.9%,
of the purchase price represented purchased in-process technology that had not
yet reached technological feasibility and had no alternative future use.
Accordingly, this amount was immediately expensed in the consolidated statement
of operations upon consummation of the acquisition. At the acquisition date, the
technologies under development, primarily the next release of the RightWorks
eBusiness Application Suite, were approximately 70% complete based on
engineering man-month data and technological progress. The value was determined
by estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the net cash flows from such projects,
and discounting the net cash flows to their present value. A discount rate of
30% was used, which includes a factor that considered the uncertainty
surrounding the successful development of the purchased in-process technology.
The purchase price allocation is preliminary and subject to final determination
and valuation of the fair value of assets and liabilities acquired.
Pro forma condensed consolidated results of operations assuming RightWorks
had been acquired on January 1, 2000 are not presented because the acquisition
of RightWorks was not considered significant based on SEC rules and regulations
regarding significant subsidiaries.
TRADE SERVICE CORPORATION/EC-CONTENT
On March 23, 2001, we completed our acquisition of Trade Service
Corporation, a leading provider of maintenance, repair and overhaul (MRO)
content and its affiliate ec-Content, Inc. (collectively, "TSC"), which develops
and manages content for digital marketplaces, e-procurement and supplier
syndication. We purchased all the outstanding stock of both companies for
approximately $79.3 million, including acquisition-related costs. The total
purchase price includes $5.0 million in cash, 800,000 shares of our common stock
with a fair market value of $12.4 million when issued, a convertible promissory
note for $60.9 million and approximately $1.0 million in acquisition costs. This
acquisition was accounted for as a purchase business combination; accordingly,
the results of operations of TSC have been included with our results of
operations since March 23, 2001.
7
The convertible promissory note issued in connection with our acquisition
of TSC will mature on September 23, 2003. Interest of 7.5% per annum is payable
in annual installments on each anniversary date of the note and upon maturity.
At any time on or after March 23, 2002, we may convert the note into shares of
our common stock based upon the "trading average" of our stock. The trading
average is the average of the last sale prices of our common stock as reported
on the Nasdaq National Market for the three consecutive trading days immediately
prior to the conversion date. If the trading average is $60.00 per share or
less, then the number of shares issued upon conversion will be determined by
dividing the outstanding principal balance and accrued interest on the note by
the trading average. If the trading average is greater than $60.00 per share,
then the number of shares issued upon conversion will be the average of (a) the
quotient derived by dividing the outstanding principal balance and accrued
interest on the note by the average of $60.00 and the trading average and (b)
the average of (i) the quotient derived by dividing the outstanding principal
balance and accrued interest on the note by $60.00 and (ii) the quotient derived
by dividing the outstanding principal balance and accrued interest on the note
by the trading average. The note is also convertible by the holder at any time
the trading average exceeds $60.00 per share using the same conversion formula
as set forth in the previous sentence. Whether the note is converted at our
option or at the option of the holder, the entire outstanding principal balance
and accrued interest payable on the note must be converted. The aggregate number
of shares of our common stock issued pursuant to the conversion of the note
cannot exceed 39 million shares. Any portion of the note that may not be
converted into shares of our common stock as a result of this limitation will
instead be paid in cash.
The total purchase price paid for the acquisition was allocated based on
the estimated fair values of the assets acquired as follows:
Net liabilities assumed..................................... $(24,628)
Identified intangible assets:
Developed technology...................................... 8,500
Assembled workforce....................................... 600
Relationships............................................. 12,500
Content databases......................................... 14,800
Goodwill.................................................... 62,872
In-process research and development......................... 4,700
--------
Total............................................. $ 79,344
========
Identified intangible assets are being amortized over two to five years,
while goodwill is being amortized over three years.
In connection with our acquisition of TSC, $4.7 million, or 5.9%, of the
purchase price represented purchased in-process technology that had not yet
reached technological feasibility and had no alternative future use.
Accordingly, this amount was immediately expensed in the consolidated statement
of operations upon consummation of the acquisition. At the acquisition date, the
technologies under development, including web-based content management and
e-commerce web-enablement technologies, ranged from 22.0% to 45.0% complete
based on engineering man-month data and technological progress. The value was
determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the net cash flows from
such projects, and discounting the net cash flows to their present value. A
discount rate of 30% was used, which includes a factor that considered the
uncertainty surrounding the successful development of the purchased in-process
technology. The purchase price allocation is preliminary and subject to final
determination and valuation of the fair value of assets and liabilities
acquired.
Pro forma condensed consolidated results of operations assuming TSC had
been acquired on January 1, 2000 are not presented because the acquisition of
TSC was not considered significant based on SEC rules and regulations regarding
significant subsidiaries.
8
ASPECT/SUPPLYBASE/IBM ASSETS
During the first quarter of 2000, we issued $233.7 million (2.6 million
shares) of our common stock for various software assets, cross-patent rights and
software licenses acquired from IBM. During the second quarter of 2000, we
issued $345.5 million (3.6 million shares) of our common stock in connection
with our acquisition of SupplyBase and $6.4 billion (67.5 million shares) of our
common stock and exchanged $2.4 billion (28.5 million options) in options to
purchase shares of our common stock in connection with our acquisition of Aspect
Development.
The following table presents unaudited pro forma selected consolidated
results of operations for the nine months ended September 30, 2000 assuming
SupplyBase and Aspect had been acquired on January 1, 2000.
Revenue..................................................... $ 801,031
Net loss.................................................... (2,262,087)
Basic and diluted loss per common share..................... (5.82)
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the period presented. In
addition they are not intended to be a projection of future results and do not
reflect any synergies that might be affected from combined operations.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is a reserve established through a
provision for bad debts charged to expense and represents our best estimate of
probable losses due to bad debts that have been incurred within the existing
accounts receivable portfolio. The allowance, in our judgment, is necessary to
reserve for known and inherent collection risks in the accounts receivable
portfolio. Allocations of the allowance may be made for specific accounts
receivable, but the entire allowance is available for any receivable that, in
our judgment, should be written off.
Activity in the allowance for doubtful accounts was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2001 2000 2001 2000
-------- -------- ------- -------
Balance at beginning of period................. $63,426 $21,829 $31,329 $17,474
Provisions for bad debts charged to costs and
expenses, net of (write-offs)............. (1,374) 3,700 30,606 4,423
Acquired allowances and other adjustments.... 2,393 69 2,510 3,701
------- ------- ------- -------
Balance at end of period....................... $64,445 $25,598 $64,445 $25,598
======= ======= ======= =======
4. LETTER OF CREDIT LINE
In August 2001, we obtained a one-year, $20.0 million letter of credit line
to replace two $15.0 million, one-year revolving lines of credit that expired.
Letters of credit issued in connection with this line will be secured by debt
securities held in our brokerage account maintained by the lender. As of
September 30, 2001, $3.5 million in letters of credit were outstanding under
this line and we had pledged $11.0 million in debt securities as collateral.
5. STOCKHOLDERS' EQUITY AND EARNINGS PER COMMON SHARE
Stock Splits. On January 14, 2000, our Board of Directors approved a
two-for-one stock split, which was paid as a 100% dividend on February 17, 2000.
On October 17, 2000, our Board of Directors approved another two-for-one stock
split, which was paid as a 100% stock dividend on December 5, 2000. All share
and per share amounts included herein have been adjusted to reflect the stock
splits.
Basic and Diluted Earnings Per Common Share. Basic and diluted earnings
per common share are computed in accordance with SFAS No. 128, "Earnings Per
Share," which requires dual presentation of basic
9
and diluted earnings per common share for entities with complex capital
structures. Basic earnings per common share is based on net income divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of stock options,
restricted stock and warrants granted using the treasury stock method, the
effect of contingently issuable shares earned during the period and shares
issuable under the conversion feature of our convertible notes using the if-
converted method. As a result of the net losses incurred during the three and
nine months ended September 30, 2001 and 2000, the effect of dilutive securities
would have been anti-dilutive to the diluted earnings per common share
computation and were thus excluded. Dilutive securities that would have
otherwise been included in the determination of the weighted-average number of
common shares outstanding for the purposes of computing diluted earnings per
common share included 35.0 million and 47.1 million shares issuable in
connection with outstanding stock option, warrant and restricted stock awards
and convertible debt for the three and nine months ended September 30, 2001 and
67.7 million and 59.6 million shares issuable in connection with stock option
and warrant awards for the three and nine months ended September 30, 2000.
Stock Option Exchange Program. On March 9, 2001, we announced a voluntary
stock option exchange program for the benefit of our employees. Under the
program, our employees were offered the opportunity, if they chose by April 15,
2001, to cancel certain outstanding stock options previously granted to them for
new stock options to be granted no earlier than October 16, 2001. The new
options will be granted with a strike price to be set at the fair market value
of our stock at the date of grant. Employees will receive 1.1 new stock options
for each stock option cancelled. The exchange program was organized to comply
with applicable accounting standards and, accordingly, no compensation charges
related to this program will result. Members of our Board of Directors,
executive officers, and certain other members of the senior management team were
not eligible to participate in this program. As discussed in Note
13 -- Subsequent Events, we completed the stock option exchange program by
granting new stock options on October 17, 2001.
6. SEGMENT INFORMATION, INTERNATIONAL OPERATIONS AND CUSTOMER CONCENTRATIONS
We operate our business in one segment, value chain software solutions
designed to help enterprises optimize business processes both internally and
among trading partners. SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information," establishes standards for reporting information about
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
We market our software and services primarily through our worldwide sales
organization augmented by other service providers, including both domestic and
international e-business providers and systems consulting and integration firms.
Our chief operating decision maker evaluates resource allocation decisions and
our performance based on financial information, presented on a consolidated
basis, accompanied by disaggregated information by geographic regions. Sales to
our customers generally include products from some or all of our product suites.
We do not allocate revenues from such sales to individual product lines for
internal or general-purpose financial statements.
Revenues are attributable to regions based on the locations of the
customers' operations. Total revenues by geographic region, as reported to our
chief operating decision maker, were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Americas................................... $137,522 $196,308 $525,341 $509,630
EMEA....................................... 33,875 86,962 159,245 150,639
APAC....................................... 22,728 36,253 107,082 88,154
-------- -------- -------- --------
$194,125 $319,523 $791,668 $748,423
======== ======== ======== ========
10
Revenues from international operations totaled $61.7 million and $284.6
million, or 31.8% and 35.9% of total revenues, for the three and nine months
ended September 30, 2001 and $126.8 million and $258.6 million, or 39.7% and
34.6% of total revenues, for the three and nine months ended September 30, 2000.
Total assets related to our international operations accounted for $247.0
million, or 10.4%, of total consolidated assets as of September 30, 2001 and
$350.3 million, or 3.8%, of total consolidated assets as of December 31, 2000.
During 2001 and the nine months ended September 30, 2000, no individual
customer accounted for more than 10.0% of total revenues. During the three
months ended September 30, 2000, one customer accounted for $36.4 million, or
11.4%, of total revenues.
7. COMMITMENTS AND CONTINGENCIES
An employee of a company we acquired in 1998 is currently disputing the
cancellation of stock options received at the time of the acquisition. Vesting
of the options was dependent upon continued employment; however, the employment
was terminated in 2000. We maintain the former employee was not entitled to
unvested stock options.
A former executive officer has made certain claims against us related to
his termination and his ability to exercise and sell certain stock options. Our
position is that the former executive officer was terminated for cause and
therefore we intend to vigorously defend against this lawsuit.
Since March 2, 2001, a number of purported class action complaints have
been filed in the United States District Court for the Northern District of
Texas (Dallas Division) against us and certain of our officers and directors.
The cases have been consolidated, and on August 3, 2001, plaintiffs filed a
consolidated amended complaint. The consolidated amended complaint alleges that
we and certain of our officers violated the federal securities laws,
specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by
making purportedly false and misleading statements concerning the
characteristics and implementation of certain of our software products. The
consolidated amended complaint seeks unspecified damages on behalf of a
purported class of purchasers of our common stock during the period between May
4, 2000 and February 26, 2001. We intend to vigorously defend against this
lawsuit and we filed a motion to dismiss the consolidated amended complaint in
September 2001.
On April 24, 2001, a shareholder derivative lawsuit was filed against us
and certain of our officers and directors in Dallas County, Texas. The suit
claims that certain of our officers and directors breached their fiduciary
duties to us and our stockholders by: (i) selling shares of our common stock
while in possession of material adverse non-public information regarding our
business and prospects, and (ii) disseminating inaccurate information regarding
our business and prospects to the market and/or failing to correct such
inaccurate information. This suit has since been removed to the United States
District Court for the Northern District of Texas (Dallas Division). We intend
to vigorously defend against this lawsuit.
We are subject to various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on our business, financial condition or results of
operations.
8. FOREIGN CURRENCY RISK MANAGEMENT
On January 1, 2001, we adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS 137 and SFAS 138. Adoption of SFAS 133 did not materially
impact our financial statements. SFAS 133 requires all derivatives to be
recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the statement of operations. Fair value changes
involving hedges will generally be recorded by offsetting gains and losses on
the hedge and on the hedged item, even if changes in the fair value of the
hedged item are not otherwise recorded. We account for all of our derivative
instruments in accordance with this standard.
Since we conduct business on a global basis in various foreign currencies,
we are exposed to adverse movements in foreign currency exchange rates. In
January 2001, we established a foreign currency hedging
11
program utilizing foreign currency forward contracts to hedge selected
nonfunctional currency exposures. The objective of this program is to reduce the
effect of changes in foreign currency exchange rates on our results of
operations. Furthermore, our goal is to offset foreign currency transaction
gains and losses recorded for accounting purposes with gains and losses realized
on the forward contracts. We have not used, nor do we expect to use, forward
contracts for trading purposes.
We generally enter into forward contracts to purchase or sell various
foreign currencies as of the last day of each month. These forward contracts
generally have original maturities of one month and are net-settled in U.S.
Dollars. Each forward contract is based on the current market forward exchange
rate as of the contract date and no premiums are paid or received. Accordingly,
these forward contracts have no fair value as of the contract date. Changes in
the applicable foreign currency exchange rates subsequent to the contract date
cause the fair value of the forward contracts to change. These changes in the
fair value of forward contracts are recorded through earnings and the
corresponding assets or liabilities are recorded on our balance sheet. Gains and
losses on the forward contracts are included in other income/expense, net in the
Consolidated Statements of Operations and offset foreign exchange gains and
losses from the revaluation of intercompany balances or other current monetary
assets and liabilities denominated in currencies other than the functional
currency of the reporting entity. During the three months ended September 30,
2001, we recognized net losses of $0.1 million on foreign currency forward
contracts and net losses of $0.3 million on foreign currency transactions.
During the nine months ended September 30, 2001, we recognized net losses of
$0.7 million on foreign currency forward contracts and net losses of $1.9
million on foreign currency transactions. We realized net gains of $0.9 million
on foreign currency transactions during the three months ended September 30,
2000 and net losses of $0.5 million on foreign currency transactions during the
nine months ended September 30, 2000.
Details of our foreign currency forward contracts as of September 30, 2001
are presented in the following table (in thousands). All of these contracts were
originated, without premiums, on September 30, 2001 based on market forward
exchange rates. Accordingly, these forward contracts had no fair value on
September 30, 2001 and no amounts related to these forward contracts were
recorded in our financial statements.
NOTIONAL AMOUNT OF FORWARD
NOTIONAL AMOUNT OF FORWARD CONTRACT
CONTRACT IN FOREIGN CURRENCY IN U.S. DOLLARS
---------------------------- --------------------------
Forward contracts to purchase:
Canadian Dollars................ CAD 4,844 $ 3,053
Danish Kroners.................. DKK 6,322 765
Singapore Dollars............... SGD 1,634 935
Swiss Francs.................... CHF 6,032 3,714
Forward contracts to sell:
Australian Dollars.............. AUD 7,935 3,853
Brazilian Reals................. BRL 2,218 803
British Pounds.................. GBP 997 1,456
European Euros.................. EUR 19,187 17,631
Indian Rupees................... INR 211,816 4,341
Japanese Yen.................... JPY 897,152 7,487
South Korean Won................ KRW 745,300 562
Our foreign currency forward contracts contain credit risk to the extent
that the bank counterparties may be unable to meet the terms of agreements. We
reduce such risk by limiting our counterparties to major financial institutions.
Additionally, the potential risk of loss with any one party resulting from this
type of credit risk is monitored.
9. EMPLOYEE BENEFIT PLANS
On March 4, 2001 and April 12, 2001, our Board of Directors approved two
amendments to our 1995 Stock Option/Stock Issuance Plan to: (i) implement an
automatic share increase feature and (ii) extend the
12
term of the plan from September 20, 2005 to April 11, 2011. The amendments were
subsequently approved by our stockholders at our annual stockholders' meeting on
May 31, 2001.
On April 20, 2001, our Board of Directors approved three amendments to our
Employee Stock Purchase Plans to: (i) implement an automatic share increase
feature; (ii) extend the term of the plan until the last business day in April
2011; and (iii) amend the stockholder approval requirements for future amendment
to the purchase plans. The amendments were subsequently approved by our
stockholders at our annual stockholders' meeting on May 31, 2001. In addition to
these changes, the Board also amended the plans to: (i) eliminate the 30 day
service requirement for participation in the purchase plans and (ii) amend the
leave of absence provision to provide a procedure by which a participant resumes
participation in the purchase plans. These other amendments did not require
stockholder approval.
10. IMPAIRMENT OF INTANGIBLES
During the third quarter of 2001, we performed an assessment of the
carrying values of our identified intangible assets and goodwill recorded in
connection with various acquisitions. The assessment was performed because of
the significant negative economic trends impacting our current operations and
expected future growth rates as well as the decline in our stock price and the
market valuations for companies within our industry. Additionally, at the time
of our analysis, the net book value of our assets significantly exceeded our
market capitalization. Based on this assessment and the consideration of all
other available evidence, we determined the decline in market conditions within
our industry was significant and not temporary. As a result, we recorded a
$243.0 million in write-downs of certain identified intangible assets as well as
a $4.5 billion write-down of enterprise goodwill.
The $243.0 million write-down of identified intangible assets was based on
the amount by which the carrying amount of these assets exceeded fair value. The
fair value of the identified intangible assets was determined by discounting our
best estimates of the expected future cash flows related to these assets. This
methodology was used to determine the fair value of these assets when they were
initially recorded, however, we now expect future cash flows from these assets
to be significantly less than our previous expectations. The rate used to
discount our cash flow expectations was based on our weighted-average cost of
capital. Identified intangible assets written-down include $4.2 million of
assembled workforce intangibles, $19.5 million of installed customer base
intangibles, $1.0 million of intellectual property, $144.7 million of cross
patent rights, $26.2 million of developed technology and $47.4 million of
content databases. The majority of these assets were originally recorded in
connection with the acquisition of Aspect and, to a lesser extent, the
acquisitions of SupplyBase and certain IBM assets. These identified intangible
assets will continue to be held and used in our business. The remaining balances
of these assets will continue to be amortized on a straight-line basis over the
remaining useful lives established at the time of the related acquisition as the
remaining useful lives of these intangible assets have not changed.
All of our goodwill is associated with our entire company ("enterprise
level") rather than any specific identifiable asset or product line. The
write-down of enterprise goodwill was determined by comparing the book value of
our common stock to our market capitalization as of September 30, 2001. Our
market capitalization is the product of (i) the number of shares of common stock
issued and outstanding and (ii) the closing market price of the common stock. At
September 30, 2001, we had 420,381,000 common shares issued and outstanding with
a book value of $5.9 billion and a market capitalization of $1.4 billion, based
on our closing common stock price of $3.44 per share. After considering all
available evidence as indicated above, we determined that the condition was not
temporary and we recorded a $4.5 billion write-down of enterprise goodwill equal
to the excess book value over market capitalization as of September 30, 2001.
Additionally, as a result of this significant impairment, we concluded the
useful lives of the goodwill recorded in connection with the acquisitions of
Aspect and SupplyBase was less than the three years originally assumed.
Accordingly, we revised the useful lives of this goodwill to 18 months from the
dates of acquisition.
As of September 30, 2001, intangibles and goodwill, net, totaled $620.6
million, including $526.6 million in goodwill, compared to $7.5 billion,
including $7.1 billion in goodwill, at December 31, 2000.
13
11. STRATEGIC RESTRUCTURING
Overview. During the second quarter of 2001, we implemented a global
restructuring plan to reduce our operating expenses and strengthen both our
competitive and financial positions. Overall expense reductions were necessary
both to lower our existing cost structure and to reallocate resources to pursue
our future operating strategies. Declining gross margins and other performance
measures such as revenue per employee during 2001 precipitated the restructuring
plan. We implemented the restructuring plan during the second quarter of 2001 by
terminating employees and reducing office space and related overhead expenses.
During the third quarter of 2001, we terminated additional employees and further
reduced our office space. The restructuring charges incurred during the second
and third quarters of 2001 primarily consisted of severance and termination
costs for the involuntarily terminated employees and office closure costs. The
majority of the restructuring activity occurred during these quarters and we
expect the remaining actions, such as additional office closures or
consolidations, will be completed within a one-year time frame. Also see Note
13 -- Subsequent Events.
Employee Severance and Termination Costs. We paid termination salaries,
benefits, stock compensation, outplacement, employee relocation costs and other
related costs to the employees involuntarily terminated worldwide. The total
workforce reduction was accomplished through a combination of involuntary
terminations and reorganizing operations to eliminate open positions resulting
from normal employee attrition. Only costs for involuntarily terminated
employees are included in the restructuring charge.
We terminated approximately 700 employees during the second quarter and
approximately 590 employees during the third quarter. The employee terminations
were across most geographic areas and functions of our business, including
administrative, professional and management positions.
The following table summarizes the approximate number of employees
terminated during the second and third quarters of 2001 by geographic region and
function:
QUARTER ENDED
-------------------------
JUNE 30, SEPTEMBER 30,
2001 2001
-------- -------------
GEOGRAPHIC REGION:
North America............................................. 600 470
EMEA...................................................... 80 80
APAC...................................................... 20 40
--- ---
700 590
=== ===
FUNCTION:
Sales and marketing....................................... 280 310
Services.................................................. 140 130
Research and development.................................. 210 80
General and administrative................................ 70 70
--- ---
700 590
=== ===
Office Closure and Consolidation Costs. Office closure and consolidation
costs are the estimated costs to close specifically identified facilities, costs
associated with obtaining subleases, lease termination costs, and other related
costs, all of which are in accordance with the restructuring plan. We closed or
consolidated several offices worldwide, including offices in North America and
Europe. As of September 30, 2001, the majority of office closings and
consolidations were completed, with the remaining moves scheduled for completion
within the next twelve months.
Asset Disposal Losses. During the second and third quarters of 2001, we
wrote off certain assets, consisting primarily of leasehold improvements,
computer equipment, and furniture and fixtures that were deemed unnecessary.
These assets were taken out of service and disposed.
14
Total cost. The following table summarizes the components of our
restructuring charges, the payments and non-cash charges, and the remaining
accruals:
NON-CASH
EMPLOYEE OFFICE ASSET
SEVERANCE AND CLOSURE AND DISPOSAL
TERMINATION CONSOLIDATION LOSSES TOTAL
------------- ------------- --------- -------
Second quarter restructuring charges:
North America................................. $11,367 $5,754 $10,142 $27,263
EMEA.......................................... 4,036 1,033 321 5,390
APAC.......................................... 347 -- -- 347
------- ------ ------- -------
Total................................. 15,750 6,787 10,463 33,000
Second quarter payments and non-cash charges.... 10,408 991 10,463 21,862
------- ------ ------- -------
Remaining accrual balance at June 30, 2001...... 5,342 5,796 -- 11,138
Third quarter restructuring charges:
North America................................. 17,984 1,823 -- 19,807
EMEA.......................................... 3,719 60 38 3,817
APAC.......................................... 332 -- -- 332
Adjustments to prior quarter restructuring
charges.................................... (1,257) (234) -- (1,491)
------- ------ ------- -------
Total................................. 20,778 1,649 38 22,465
Third quarter payments and non-cash charges..... 10,115 1,048 38 11,201
------- ------ ------- -------
Remaining accrual balance at September 30,
2001.......................................... $16,005 $6,397 $ -- $22,402
======= ====== ======= =======
12. NEW ACCOUNTING STANDARDS
SFAS No. 141, "Business Combinations." SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Use of the pooling-of-interests method will be prohibited. Adoption of
SFAS 141 in connection with our acquisition of RightWorks on August 22, 2001 did
not significantly impact our financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 142 changes the
accounting for goodwill by eliminating amortization and replacing impairment
testing under SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of" and Accounting Principals Board (APB)
Opinion No. 17, "Intangible Assets," with a new impairment test. On January 1,
2002, all of our goodwill will be assigned to one or more reporting units and
amortization of goodwill, including goodwill recorded in past business
combinations, will cease. In accordance with SFAS 142, goodwill will be tested
for impairment using a two-step approach. The first step is to compare the fair
value of a reporting unit to its carrying amount, including goodwill. If the
fair value of the reporting unit is greater than its carrying amount, goodwill
is not considered impaired and the second step is not required. If the fair
value of the reporting unit is less than its carrying amount, the second step of
the impairment test measures the amount of the impairment loss, if any. The
second step of the impairment test is to compare the implied fair value of
goodwill to its carrying amount. If the carrying amount of goodwill exceeds its
implied fair value, an impairment loss is recognized equal to that excess. The
implied fair value of goodwill is calculated in the same manner that goodwill is
calculated in a business combination, whereby the fair value of the reporting
unit is allocated to all of the assets and liabilities of that unit (including
any unrecognized intangible assets) as if the reporting unit had been acquired
in a business combination and the fair value of the reporting unit was the
purchase price. The excess "purchase price" over the amounts assigned to assets
and liabilities would be the implied fair value of goodwill. This allocation is
performed only for purposes of testing goodwill for impairment and does not
require us to record the "step-up" in net assets or any unrecognized intangible
assets. Goodwill will be tested for impairment at least annually, or on an
interim basis if an event occurs or circumstances change that would
more-likely-than-not reduce the fair value of a reporting unit below its
carrying value.
Identified intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 121.
Identified intangible assets with indefinite useful lives will not
15
be amortized until their lives are determined to be definite. These assets will
be tested for impairment annually and on an interim basis if an event or
circumstance occurs between annual tests indicating that the assets might be
impaired. The impairment test will consist of comparing the fair value of the
identified intangible asset to its carrying amount. If the fair value is less
than the carrying amount, an impairment loss will be recognized in an amount
equal to that difference.
Presently, all of our goodwill is associated with the entire company. Based
upon our review of the carrying value of goodwill in accordance with current
accounting guidance, during the third quarter of 2001, we recognized a $4.5
billion write-down of goodwill. As of September 30, 2001, remaining goodwill
totaled $526.6 million, most of which we expect to amortize in the fourth
quarter of 2001. Our expected amount of goodwill amortization in the fourth
quarter of 2001 reflects a revision of the estimated useful lives of the
goodwill recorded in connection with our acquisitions of Aspect and SupplyBase
as discussed in Note 10 -- Impairment of Intangibles. At this time we have not
determined how goodwill will be allocated to specific reporting units upon
adoption of SFAS 142 on January 1, 2002. Additionally, we have not appraised the
value of any such reporting units. Accordingly, we have not yet made a
determination about whether or not an impairment charge will be necessary upon
adoption of the new standard. We expect the impact of the cessation of goodwill
amortization upon the adoption of this standard will be insignificant because we
anticipate most of our current goodwill will be fully amortized prior to January
1, 2002.
As indicated in Note 2 -- Business Combinations and Asset Acquisitions, the
acquisition of RightWorks was completed in the third quarter of 2001. In
accordance with SFAS 142, goodwill acquired in this acquisition will not be
amortized, even though amortization of goodwill acquired in business
combinations prior to June 30, 2001 will continue through December 31, 2001.
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 will be effective for us on January 1, 2003. We do not expect
adoption of this standard will impact our financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 but
retains SFAS 121's fundamental provisions for (i) recognition/measurement of
impairment of long-lived assets to be held and used and (ii) measurement of
long-lived assets to be disposed of by sale. SFAS 144 also supersedes the
accounting and reporting provisions of APB 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
segments of a business to be disposed of but retains APB 30's requirement to
report discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of or
is classified as held for sale. SFAS 144 will be effective for us on January 1,
2002. We do not expect adoption of this standard will significantly impact
financial statements.
13. SUBSEQUENT EVENTS
On October 16, 2001, despite our significant progress in reducing our cost
structure and in light of continued deterioration in economic factors affecting
our industry and uncertainty regarding the future, we announced additional cost
reduction initiatives to create a more efficient cost structure. These
initiatives include, among other things, increasing the proportion of our
development workforce in India, a "cash compensation for stock options" program
(discussed below), and further reductions in the global workforce by early 2002.
Accordingly, we expect to incur an additional restructuring charge related to
the workforce reduction, among other things, in the fourth quarter of 2001.
On October 16, 2001, we announced a voluntary "cash compensation for stock
options" program whereby our employees have been given the opportunity to elect,
by November 15, 2001, to receive a reduction in annual base salary for a
twelve-month period starting on November 16, 2001 in exchange for stock options.
The stock options will be granted on November 16, 2001. The number of options
granted will be based upon the amount of annual base salary reduction elected by
each participant. The stock options will have an exercise
16
price equal to the closing share price on that day. A total of 10.0 million
shares have been set aside for stock options granted in connection with this
program. Should the employee participation rate require stock option grants for
more than 10.0 million shares, we will either (i) increase the available pool of
10.0 million shares or (ii) reduce employee participation on a proportionate
basis.
On October 17, 2001, we completed our voluntary stock option exchange
program whereby we granted 37.7 million new stock options to participating
employees with an exercise price of $4.29 per share, the closing share price on
that day. Participating employees received 1.1 new stock options for each stock
option cancelled prior to April 15, 2001. The exchange program was organized to
comply with applicable accounting standards and, accordingly, no compensation
charges related to this program were recognized.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than historical or current facts,
including, without limitation, statements about our business, financial
condition, business strategy, plans and objectives of management and our future
prospects, are forward-looking statements. Such forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from these expectations. Such risks and uncertainties include,
without limitation, the following:
- Our financial results may vary significantly from quarter to quarter or
we may continue to fail to meet expectations, which would negatively
impact the price of our stock.
- Continued reduction in the pace of information technology spending and
weakening of general economic conditions could further negatively impact
our revenues.
- Failure to achieve the desired results of our restructuring and strategic
initiatives, including managing staff reductions and changes within our
sales force and management team, could result in business distractions
that harm our business.
- We anticipate seasonal fluctuations in revenues, which may cause
volatility in our stock price.
- Historically, a small number of individual license sales have been
significant in each quarterly period. Therefore, our operating results
for a given period could suffer serious harm if we fail to close one or
more large sales expected for that period.
- We may not remain competitive and increased competition could seriously
harm our business.
- Any decrease in demand for our products and services could significantly
reduce our revenues.
- Other risks indicated below under the section captioned "Factors that May
Affect Future Results" and in our other filings with the SEC.
These risks and uncertainties are beyond our control and, in many cases, we
cannot predict the risks and uncertainties that could cause our actual results
to differ materially from those indicated by the forward-looking statements.
When used in this document, the words "believes," "plans," "expects,"
"anticipates," "intends," "continue," "may," "will," "should" or the negative of
such terms and similar expressions as they relate to us, our customers, or our
management are intended to identify forward-looking statements.
References in this report to the terms "optimal" and "optimized" and words
to that effect are not necessarily intended to connote the mathematically
optimal solution, but may connote near-optimal solutions, which reflect
practical considerations such as customer requirements as to response time,
precision of the results and other commercial factors.
OVERVIEW
We are a leading provider of dynamic value chain software solutions that
may be used by enterprises to optimize business processes both internally and
among trading partners. Our solutions are designed to help enterprises improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
products are designed to help customers, partners, suppliers and service
providers conduct business together and offer a technology infrastructure
supporting collaboration, commerce and content. Our product suites include
software solutions for supply chain management, supplier relationship management
and customer relationship management. We also provide content and content
management solutions as well as a platform for integration and administration of
private and public electronic marketplaces. Our product suites may be used by
our customers to align their value chain to serve their customers. We also
provide services such as consulting, training and maintenance in support of
these offerings.
18
During the second quarter of 2001, we implemented a plan to strengthen our
operations. Initiatives that are a part of this plan include:
- Achieving organizational alignment around our business objectives. As a
part of this initiative, we formed a centralized product marketing
organization and regionalized our organizational reporting structure.
Additionally, on July 1, 2001, we formed an operating company, i2
Technologies US, Inc., and transferred our employees, the majority of our
assets and certain liabilities and agreements to this new wholly-owned
subsidiary.
- Creating a sustainable cost structure. During the second quarter of 2001,
we implemented a strategic restructuring plan with the objective of
reducing our cost structure. Our cost control initiatives are focused on
virtually every facet of our business and continue to be an ongoing
process. See Note 11 -- Strategic Restructuring and Note 13 -- Subsequent
Events in the Notes to Condensed Consolidated Financial Statements
included elsewhere in this report.
- Realigning our sales force around our core products including Supply
Chain Management (SCM) solutions and Supplier Relationship Management
(SRM) solutions. The goal of this realignment is to ensure our customers
receive a faster return on their investment.
- Increasing our demand generation programs through a series of seminars
and events that feature leading e-business professionals and industry
experts sharing their experiences and best practices for gaining a
competitive advantage through dynamic value chain creation.
- Focusing on marketing customer successes through go-lives. We believe
that the faster we get a customer live and realizing value, the more
likely they are to purchase additional solutions and to provide
references for new customers. During the third quarter of 2001, we
announced 122 go-lives.
- Utilizing partners that create more demand for our products.
- Creating a product that is packaged for high-volume sales. On October 25,
2001, we released i2 Five.Two. i2 Five.Two is a solution designed to
optimize processes that span the entire enterprise.
19
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues
represented by selected items reflected in our Condensed Consolidated Statements
of Operations. The quarter-to-quarter comparisons of financial results are not
necessarily indicative of future results.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2001 2000 2001 2000
-------- ------ ------- ------
Revenues:
Software licenses........................ 35.0% 63.1% 48.6% 62.2%
Services................................. 38.7 24.1 31.8 24.6
Maintenance.............................. 26.3 12.8 19.6 13.2
-------- ------ ------- ------
Total revenues................... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of revenues:
Cost of software licenses............. 6.0 5.9 6.6 4.6
Amortization of acquired technology... 7.1 3.6 4.9 2.2
Cost of services and maintenance...... 35.2 21.0 29.8 20.9
Sales and marketing...................... 54.9 34.7 49.7 35.1
Research and development................. 35.9 19.1 27.3 20.3
General and administrative............... 13.4 7.2 10.6 8.1
Amortization of intangibles.............. 393.4 238.1 288.4 128.9
In-process research and development and
acquisition-related expenses.......... 4.1 0.9 1.6 13.6
Impairment of intangibles................ 2,442.0 -- 598.8 --
Restructuring charges.................... 11.6 -- 7.0 --
-------- ------ ------- ------
Total costs and expenses......... 3,003.6 330.5 1,024.7 233.7
-------- ------ ------- ------
Operating loss............................. (2,903.6) (230.5) (924.7) (133.7)
Other income (expense), net................ (22.5) 2.3 (7.5) 1.9
Non-cash settlement........................ -- (7.0) -- (3.0)
-------- ------ ------- ------
Loss before income taxes................... (2,926.1) (235.2) (932.2) (134.8)
Provision (benefit) for income taxes....... (79.3) 1.4 (27.6) 2.1
-------- ------ ------- ------
Net loss................................... (2,846.8)% (236.6)% (904.6)% (136.9)%
======== ====== ======= ======
REVENUES
Revenues consist of software license revenues, service revenues, and
maintenance revenues, and are recognized in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition," as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions," and SEC Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition."
Software license revenues are recognized upon shipment, provided fees are
fixed and determinable and collection is probable. Revenue for agreements that
include one or more elements to be delivered at a future date is recognized
using the residual method. Under the residual method, the fair value of the
undelivered elements is deferred, and the remaining portion of the agreement fee
is recognized as license revenue. If fair values have not been established for
certain undelivered elements, revenue is deferred until those elements have been
delivered, or their fair values have been determined. Agreements that include a
right to unspecified future products are recognized ratably over the term of the
agreement. License fees from reseller agreements are generally based on the
sublicenses granted by the reseller and typically recognized when the license is
sold to the end customer. Licenses to our content databases are recognized over
the term of the agreements. Fees from licenses sold together with services are
generally recognized upon shipment, provided fees are fixed and
20
determinable, collection is probable, payment of the license fee is not
dependent upon the performance of the consulting services and the consulting
services are not essential to the functionality of the licensed software.
Service revenues are primarily derived from fees for implementation,
consulting and training services and are generally recognized as the services
are performed under service agreements in connection with initial license sales.
Maintenance revenues are derived from technical support and software
updates provided to customers. Maintenance revenue is recognized ratably over
the term of the maintenance agreement, generally one year.
Payments received in advance of revenue recognized are classified as
deferred revenue in the Consolidated Balance Sheets.
Total revenues decreased $125.4 million, or 39.2%, and increased $43.2
million, or 5.8%, during the three and nine months ended September 30, 2001,
compared to the same periods in 2000. We derived substantially all of our
revenues from licenses associated with our software products and content
databases and related services and maintenance.
Software Licenses. Software license revenues constituted 35.0% and 48.6%
of total revenues during the three and nine months ended September 30, 2001,
compared to 63.1% and 62.2% for the same periods in 2000. Software license
revenues decreased $133.6 million, or 66.3%, and $80.5 million, or 17.3%, during
the three and nine months ended September 30, 2001, compared to the same periods
in 2000. The decreases are primarily the result of a decline in sales
productivity arising from the weakening macroeconomic environment. The abrupt
slowdown in the economy started to affect us in the first quarter of 2001. Poor
economic conditions have caused a significant decrease in technology and capital
spending as well as extended the decision cycles of many potential customers.
The terrorist attacks on September 11, 2001 further compounded the recession-
like environment we were already experiencing, causing customers to postpone or
cancel projects and disrupting sales cycles.
We recognized 55 and 244 software license transactions during the three and
nine months ended September 30, 2001 compared to 104 and 270 during the three
and nine months ended September 30, 2000. The average size of our license
transactions was $0.9 million and $1.4 million for the three and nine months
ended September 30, 2001 compared to $1.8 million and $1.7 million for the three
and nine months ended September 30, 2000. The decline in the average sales price
was partly the result of decreases in technology spending by many potential
customers due to poor economic conditions.
Our direct sales channel is responsible for most of our license revenues.
Although we believe direct sales will continue to account for most of our
software license revenues for the foreseeable future, our strategy is to
continue to increase the level of indirect sales activities. We expect sales of
our software products through, or in conjunction with, sales alliances,
distributors, resellers and other indirect channels to increase as a percentage
of software license revenues; however, there can be no assurance that our
efforts to expand indirect sales will be successful or will continue in the
future.
Services. Service revenues consist of fees generated by providing services
to customers, including consulting, training and other services. Service
revenues constituted 38.7% and 31.8% of total revenues during the three and nine
months ended September 30, 2001, compared to 24.1% and 24.6% during the same
periods in 2000. Service revenues as a percentage of total revenues have
fluctuated, and are expected to continue to fluctuate on a year-to-year basis,
as revenues from the implementation of software are not generally recognized in
the same period as the related license revenues. In any period, total service
revenues are dependent on, among other things:
- License transactions closed during the current and preceding periods.
- Customer decisions regarding implementations of licensed software.
- The number of our internal service providers and consultants actively
engaged on billable projects.
Service revenues decreased $1.9 million, or 2.5%, and increased $66.9
million, or 36.3%, during the three and nine months ended September 30, 2001,
compared to same periods in 2000. The decrease over the
21
comparable three-month periods resulted from the decrease in license
transactions closed during the current and preceding quarters. The increase in
service revenues over the comparable nine-month periods was due to an increase
in the number of sales in the latter part of 2000 and early 2001 and resulting
demand for consulting and implementation services. The increase was also partly
due to expanded use of third-party consultants as subcontractors to provide
implementation services to our customers. This has allowed us to increase our
penetration into various international and targeted vertical markets. During the
third quarter of 2001, we experienced a sequential decline in service revenues
compared to the second quarter of 2001 primarily due the declining demand for
consulting and implementation services. There is no assurance that the demand
for consulting and implementation services will improve, or even remain at
current levels.
Maintenance. Maintenance revenues increased to 26.3% and 19.6% of total
revenues during the three and nine months ended September 30, 2001, from 12.8%
and 13.2% during the same periods in 2000. Maintenance revenues increased $10.2
million, or 24.9%, and $56.8 million, or 57.7%, during the three and nine months
ended September 30, 2001, compared to the same periods in 2000. In 2000, we
began offering new, tiered levels of maintenance with proportionately higher
fees for higher levels of service. The increases in maintenance revenues were
also due to continued growth of our installed customer base and maintenance
renewals. During the third quarter of 2001, we experienced a sequential decline
in the level of maintenance renewals compared to the second quarter of 2001.
There is no assurance that amount maintenance renewals will improve, or even
remain at current levels.
International Revenues. Our international revenues are primarily generated
from customers located in Europe, Asia, Canada and Latin America. International
revenues totaled $61.7 million, or 31.8% of total revenues, and $284.6 million,
or 35.9% of total revenues, during the three and nine months ended September 30,
2001, compared to $126.8 million, or 39.7% of total revenues, and $258.6
million, or 34.6% of total revenues, during the same periods in 2000. The
decline in international revenue during the three months ended September 30,
2001 was primarily due to decreases in technology spending, particularly in
Europe and parts of Asia, in response to deteriorating economic conditions. The
increase in international revenues both in dollar amount and as a percentage of
total revenues over the comparable nine-month periods is consistent with our
efforts to expand our international presence and sales efforts. We believe
continued growth and profitability will require further expansion in
international markets. We have expended substantial resources to expand our
international operations.
COSTS AND EXPENSES
Cost of Software Licenses. Cost of software licenses consists of:
- Commissions paid to third parties in connection with joint marketing and
other related agreements.
- Royalty fees associated with third-party software.
- Costs related to user documentation.
- Costs related to reproduction and delivery of software.
Cost of software licenses as a percentage of related revenue was 17.2% and
13.5% during the three and nine months ended September 30, 2001, compared to
9.4% and 7.5% for the same periods in 2000. Cost of software licenses decreased
$7.3 million, or 38.3%, during the three months ended September 30, 2001 and
increased $17.2 million, or 49.6%, during the nine months ended September 30,
2001, compared to the same periods in 2000. The increase in the cost of software
licenses as a percentage of related revenue primarily resulted because we have
certain fixed royalty fees that are not dependent upon sales volume. The
decrease in the cost of software licenses in actual dollars over the comparable
three-month periods was primarily due to the decrease in sales volume. The
increase in the cost of software licenses in actual dollars are over the
comparable nine-month periods was primarily due to increases in commissions paid
to third parties in connection with joint marketing efforts and other sales
assistance and increases in the amount of royalty fees associated with
third-party software.
22
Amortization of Acquired Technology. In connection with our various
acquisitions, we acquired developed technology that we offer as a part of our
integrated solutions. Amortization of the capitalized acquired technology
totaled $13.8 million and $38.9 million during the three and nine months ended
September 30, 2001, compared to $11.4 million and $16.7 million for the three
and nine months ended September 30, 2000. The increase over the comparable
nine-month periods resulted because we had no capitalized acquired technology
prior to our acquisitions of Aspect and SupplyBase during the second quarter of
2000. In accordance with SFAS No. 86, "Accounting for Computer Software to Be
Sold, Leased, or Otherwise Marketed," the amortization expense is included as a
part of our cost of revenues because it relates to software products that are
marketed to others.
Cost of Services and Maintenance. Cost of services and maintenance
includes costs associated with the implementation of software solutions and
consulting and training services. Cost of services and maintenance also includes
the cost of providing software maintenance to customers such as telephone
support and other costs related to new releases of software and updated user
documentation.
Cost of services and maintenance as a percentage of related revenues was
54.2% and 58.1% during the three and nine months ended September 30, 2001,
compared to 56.8% and 55.2% for the same periods in 2000. The total cost of
services and maintenance increased $1.4 million, or 2.1%, and $79.9 million, or
51.1%, during the three and nine months ended September 30, 2001, compared to
the same periods in 2000. The increases in both dollar amount and percent of
revenue over the comparable nine-month periods are primarily attributable to
increases in the number of consultants and product support staff.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of personnel costs, commissions, travel, and promotional events such
as trade shows, seminars, technical conferences, advertising and public
relations programs. Sales and marketing expenses decreased $4.3 million, or
3.9%, during the three months ended September 30, 2001 and increased $130.5
million, or 49.7%, during the nine months ended September 30, 2001, compared to
the same periods in 2000. The decrease over the comparable three-month periods
was primarily due to the disruption of our sales cycles caused by the terrorist
attacks on September 11, 2001. As a result of this disruption, we did not incur
sales and revenue-related expenses that would have normally been incurred. The
increase over the comparable nine-month periods was due to:
- An increase in the average number of direct sales representatives during
2001, compared to 2000.
- Increased marketing and promotional activities due to the expansion of
our suite of e-business and value-chain software solutions and our
expansion into new international markets.
- An increase in bad debt expense. During the second quarter of 2001, we
incurred a special charge of approximately $26.0 million for bad debt
expense taken primarily as a result of conditions surrounding dot-com and
public marketplace customers. The majority of this charge was allocated
to sales and marketing expense.
Research and Development Expenses. Research and development expenses
consist of continued software development and product enhancements to existing
software. Software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of our products and general
release of such software has substantially coincided. As a result, software
development costs qualifying for capitalization have been insignificant;
therefore, we have not capitalized any software development costs other than
those recorded in connection with our acquisitions.
Research and development expenses increased $8.7 million, or 14.3%, and
$64.3 million, or 42.3%, during the three and nine months ended September 30,
2001, compared to the same periods in 2000. Research and development expenses as
a percentage of total revenues were 35.9% and 27.3% during the three and nine
months ended September 30, 2001 compared to 19.1% and 20.3% for the three and
nine months ended September 30, 2000. The increase in research and development
expenses as a percentage of total revenues primarily resulted from a decline in
sales. The increases in the dollar amount of research and development expenses
were due to an increase in the average number of research and development
personnel over the comparable periods. Additionally, the research and
development expenses for 2000 only included the effect of
23
the personnel added with the acquisition of Aspect from its acquisition date on
June 9, 2000. Approximately 600 research and development employees were added in
that acquisition.
On October 16, 2001, we announced a program to increase the proportion of
our development workforce in India in order to take advantage of our previous
experience and infrastructure in India, and the relative cost efficiencies. This
program is designed to reduce our overall cost structure with respect to our
research and development activities. The number of current U.S. held positions
that will be moved to India has not yet been determined.
General and Administrative Expenses. General and administrative expenses
include the personnel and other costs of our finance, legal, accounting, human
resources, information systems and executive departments. General and
administrative expenses increased $3.1 million, or 13.7%, and $23.3 million, or
38.5%, during the three and nine months ended September 30, 2001, compared to
the same periods in 2000. General and administrative expenses as a percentage of
total revenues were 13.4% and 10.6% during the three and nine months ended
September 30, 2001 compared to 7.2% and 8.1% during the same periods in 2000.
The increases in general and administrative expenses were primarily due to the
cost of supporting an increased average number of personnel over the comparable
periods, as well as increases in the number and size of our facilities. The
increase in general and administrative expenses as a percentage of total
revenues resulted from a decline in sales productivity from the weakening
macroeconomic environment. We expect to reduce the dollar amount of general and
administrative expenses as a part of our cost control initiatives that began in
the second quarter.
Amortization of Intangibles and Impairment of Intangibles. From time to
time, we have sought to supplement the expanding depth and breadth of our
product offerings through technology or business acquisitions. When an
acquisition of a business is accounted for using the purchase method, the amount
of the purchase price is allocated to the fair value of assets acquired, net of
liabilities assumed. Any excess purchase price is allocated to goodwill.
Goodwill is amortized over the life of the asset (typically two to three years).
Details of our acquisitions of TSC and RightWorks during the first and third
quarters of 2001, respectively, are presented in Note 2 -- Business Combinations
and Asset Acquisitions in the Notes to Condensed Consolidated Financial
Statements included elsewhere in this report.
Amortization of goodwill and other intangibles (excluding the amortization
of acquired technology) related to acquisitions totaled $763.6 million and $2.3
billion during the three and nine months ended September 30, 2001 compared to
$760.7 million and $964.4 million for the three and nine months ended September
30, 2000. During the third quarter of 2001, we performed an assessment of the
carrying values of our identified intangible assets and goodwill recorded in
connection with various acquisitions. The assessment was performed in light of
the significant negative economic trends impacting our current operations and
expected future growth rates as well as the decline in our stock price and the
market valuations for companies within our industry. Additionally, at the time
of our analysis, the net book value of our assets significantly exceeded our
market capitalization. Based on this assessment and the consideration of all
other available evidence, we determined the decline in market conditions within
our industry was significant and not temporary. As a result, we recorded $243.0
million in write-downs of certain identified intangible assets as well as a $4.5
billion write-down of enterprise goodwill. See Note 10 -- Impairment of
Intangibles in the Notes to Condensed Consolidated Financial Statements included
elsewhere in this report.
As of September 30, 2001, intangibles and goodwill, net, totaled $620.6
million, including $526.6 million in goodwill, compared to $7.5 billion,
including $7.1 billion in goodwill, at December 31, 2000. In accordance with a
new accounting standard issued in July 2001, amortization of goodwill will
continue through December 31, 2001. Beginning January 1, 2002, amortization of
goodwill will cease and goodwill will only be reduced when the carrying value is
deemed to be impaired. Amortization of other intangibles will continue until
they are fully amortized. See Note 12 -- New Accounting Standards in the Notes
to Condensed Consolidated Financial Statements included elsewhere in this
report.
In-Process Research and Development and Acquisition-Related
Expenses. Technology or business acquisitions may include the purchase of
technology that has not yet been determined to be technologically feasible and
has no alternative future use in its then-current stage of development. In such
instances, and in accordance with appropriate accounting guidelines, the portion
of the purchase price allocated to in-process
24
research and development is expensed immediately upon the consummation of the
acquisition. The write-off of acquired in-process research and development
totaled $8.0 million and $12.7 million during the three and nine months ended
September 30, 2001. These amounts are related to the acquisitions TSC and
RightWorks in the first and third quarters, respectively.
RightWorks: As of the acquisition date, RightWorks was conducting design,
development, engineering and testing activities associated with the completion
of the next release of the RightWorks eBusiness Application Suite. The
applications under development at the valuation date represented next-generation
technologies that were targeted to (i) enhance purchase order management
capability; (ii) enhance negotiation capability; (iii) enhance
multi-organization architecture; (iv) provide new user interface; and (v)
support additional technology stacks.
At the acquisition date, the technologies under development were
approximately 70% complete based on engineering man-month data and technological
progress. RightWorks had spent $4.4 million on the in-process projects, and
expected to spend an additional $2.6 million to complete all phases of the
research and development. The anticipated completion date was expected to be in
the fourth quarter of 2001.
Aggregate revenues for the developmental RightWorks products were estimated
to peak in 2003, assuming the successful completion and market acceptance of the
in-process research and development project, and decline thereafter through 2005
as other new products and technologies enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the successful development of the
projects, a discount rate of 30.0% was used to value the in-process research and
development. The discount rate utilized was higher than our weighted average
cost of capital due to the inherent uncertainties surrounding the successful
development of the purchased in-process technology, the useful life of such
technology, the profitability levels of the technology, and the uncertainty of
technological advances that are unknown at this time.
If this project is not successfully developed, our revenues and operating
results could be adversely affected in future periods. Additionally, the value
of other acquired intangible assets may become impaired.
Trade Service Corporation/ec-Content: As of the acquisition date, TSC was
conducting design, development, engineering and testing activities associated
with the completion of its ec-Central and eTRA-SER development programs. The
web-based content management and e-commerce web enablement projects under
development at the valuation date represented next-generation technologies that
were expected to address emerging market demands for business-to-business (B2B)
e-commerce content management.
At the acquisition date, the technologies under development ranged from
22.0% to 45.0% complete based on engineering man-month data and technological
progress. TSC had spent $4.2 million on the in-process projects, and expected to
spend approximately $6.8 million to complete all phases of the research and
development. Anticipated completion dates ranged from three to six months.
Aggregate revenues for the developmental TSC products were estimated to
grow at a compounded annual growth rate of approximately 47.0% from 2001 to
2003, assuming the successful completion and market acceptance of the major
research and development programs. The estimated revenues for the in-process
projects were expected to peak within three years of acquisition and then
decline sharply as other new products and technologies enter the market.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the successful development of the
projects, a discount rate of 30.0% was used to value the in-process research and
development. The discount rate utilized was higher than our weighted average
cost of capital due to the inherent uncertainties surrounding the successful
development of the purchased in-process technology, the useful life of such
technology, the profitability levels of the technology, and the uncertainty of
technological advances that are unknown at this time.
25
Shortly after we acquired TSC, the eTRA-SER project was placed on hold
pending a technology review to ascertain if there was any complementary or
substitute i2 technology that could reduce development time and cost, or
eliminate this development project. As a result of this review, the existing
eTRA-SER specification was revised to ensure compatibility with anticipated i2
data models and a development contract was put out to bid. We selected the
project subcontractor and negotiated a fixed price development contract that was
settled in late July 2001. Accordingly, we now do not expect to begin to realize
revenue from this project until the fourth quarter of 2001 and we expect actual
results to be less than our initial forecasts for 2001 and 2002. If this project
is not successfully developed, our revenues and operating results could be
adversely affected in future periods. Additionally, the value of other acquired
intangible assets may become impaired.
The ec-Central project was terminated in June 2001. The project was
discontinued because a substitute technology was identified that will be
combined with our TradeMatrix platform which will serve as the content delivery
platform for all i2 customers.
Over the next three months we expect to evaluate the ec-Central software
applications, some of which are complete, and will also evaluate the ec-Central
database design. Based on this review, certain software applications and the
database may be incorporated into another content maintenance and publishing
platform. At this time, we believe there is a low probability of pursuing this
use of the software and database.
During the nine months ended September 30, 2000, the write-off of
in-process research and development totaled $101.2 million, of which $8.9
million related to the acquisition of certain IBM assets in the first quarter;
$6.4 million and $83.0 million related to the acquisitions of SupplyBase and
Aspect, respectively, in the second quarter; and $2.9 million related to an
insignificant acquisition in the third quarter. We expect to continue to expand
through acquisitions and the resulting write-off of in-process research and
development could vary significantly from quarter to quarter.
Restructuring Charges. During the second quarter of 2001, we implemented a
global restructuring plan to reduce our operating expenses and strengthen both
our competitive and financial positions. Overall expense reductions were
necessary both to lower our existing cost structure and to reallocate resources
to pursue our future operating strategies. Declining gross margins and other
performance measures such as revenue per employee during 2001 precipitated the
restructuring plan. We recorded restructuring charges of $22.5 million and $55.5
million during the three and nine months ended September 30, 2001. We
implemented the restructuring plan during the second quarter of 2001 by
terminating employees and reducing office space and related overhead expenses.
During the third quarter of 2001, we terminated additional employees and further
reduced our office space. The restructuring charges incurred during the second
and third quarters of 2001 primarily consisted of severance and termination
costs for the involuntarily terminated employees and office closure costs. The
majority of the restructuring activity occurred during these quarters and we
expect the remaining actions, such as additional office closures or
consolidations, will be completed within a one-year time frame. See Note
11 -- Strategic Restructuring and Note 13 -- Subsequent Events in the Notes to
Condensed Consolidated Financial Statements included elsewhere in this report.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, consists of interest income on investments
partially offset by interest expense, realized gains/losses on equity
investments, foreign currency exchange transaction gains/losses, gains/losses on
foreign currency exchange forward contracts and other miscellaneous income and
expense. During the three and nine months ended September 30, 2001, we
recognized net other expenses of $43.7 million and $59.5 million compared to net
other income of $7.2 million and $13.9 million during the same periods in 2000.
Other income (expense), net, for the three and nine months ended September
30, 2001, included net realized losses on equity investments of $45.2 million
and $69.1 million, which included the write-down of the carrying basis of
certain equity investments as a result of significant declines in the fair value
and expected realizable amounts of these investments. Only $0.6 million in
losses on equity investments were realized during both the three and nine months
ended September 30, 2000. Excluding these losses, we would have
26
realized net other income of $1.5 million and $9.6 million for the three and
nine months ended September 30, 2001, compared to $7.9 million and $14.6 million
for the same periods in 2000. The decreases in other income, net, excluding
losses on equity investments, primarily resulted from decreases in interest
income due to significant declines in market interest rates combined with an
increase in interest expense related to the additional $60.9 million in
convertible debt issued in connection with our acquisition of TSC. The decreases
in other income, net, excluding losses on equity investments, were also
attributable to increased net foreign currency exchange transaction losses. The
interest yields on investments and the relative exchange values of foreign
currencies are influenced by the monetary and fiscal policies of the governments
in the countries we operate. The nature, timing and extent of any impact on our
financial statements resulting from changes in those governments' policies are
not predictable. Risks associated with market interest rates and foreign
exchange rates are discussed below under the section captioned "Sensitivity to
Market Risks."
NON-CASH SETTLEMENT
On October 10, 2000, we settled a lawsuit filed by a former employee
regarding his right to exercise stock options granted to him in 1996 while he
was employed by us, prior to our initial public offering. The settlement
resulted in the recording of a non-cash, pre-tax charge of $22.4 million during
the third quarter of 2000.
PROVISION (BENEFIT) FOR INCOME TAXES
We recognized income tax benefits of $154.0 million and $218.3 million
during the three and nine months ended September 30, 2001. Our effective income
tax rates for these periods were 2.7% and 3.0%. We recognized income tax expense
of $4.4 million and $15.5 million during the three and nine months ended
September 30, 2000 despite our net losses before income taxes, resulting in
negative effective tax rates of (0.6)% and (1.5)%. The effective income tax
rates during the three and nine months ended September 30, 2001, and to a lesser
extent in the same periods in 2000, differed from the U.S. statutory rate
primarily due to the non-deductibility of goodwill, in-process research and
development and acquisition-related expenses. Other items affecting our
effective tax rate during the periods presented include state taxes (net of
federal tax benefits), non-deductible meals and entertainment, deferred tax
asset valuation allowances and research and development tax credits. Excluding
the impact of these and other items, our effective tax rate was 36.0% during the
three and nine months ended September 30, 2001 and 37.5% during the three and
nine months ended September 30, 2000.
As of September 30, 2001 and December 31, 2000, we had net deferred tax
assets totaling $605.5 million and $356.5 million. Realization of our deferred
tax asset is dependent upon the U.S. consolidated tax group of companies having
sufficient Federal taxable income in future years to utilize our net operating
loss carryforwards before they expire from 2006 through 2021. In 2000, we
recognized a significant tax benefit from the exercise of stock options, which
was reflected as an increase to additional paid-in capital in our financial
statements. We have not realized a significant tax benefit from stock option
exercises in 2001 and believe it is unlikely a similar annual tax benefit of
this relative magnitude from stock option exercises will be realized this year
or in the foreseeable future. Considering our current level of taxable income
without a stock option tax benefit of this magnitude, we believe it is more
likely than not that the deferred tax asset will be realized during the net
operating loss carryforward period. A reduction in our federal taxable income
could cause a portion or all of our net operating loss carryforwards to expire
with a corresponding loss of the related deferred tax asset.
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share are computed in accordance with
SFAS No. 128, "Earnings Per Share," which requires dual presentation of basic
and diluted earnings per common share for entities with complex capital
structures. Basic earnings per common share is based on net income divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of stock options,
restricted stock and warrants granted using the treasury stock method, the
effect of contingently issuable shares earned during the period and shares
issuable under the
27
conversion feature of our convertible notes using the if-converted method.
Future weighted-average shares outstanding calculations will be impacted by the
following factors:
- The ongoing issuance of common stock associated with stock option
exercises and restricted stock awards.
- The issuance of common shares associated with our employee stock purchase
plans.
- Any fluctuations in our stock price, which could cause changes in the
number of common stock equivalents included in the diluted earnings per
common share calculation.
- The issuance of stock options in connection with our stock option
exchange program. See Note 5 -- Stockholders' Equity and Earnings Per
Common Share and Note 13 -- Subsequent Events in the Notes to Condensed
Consolidated Financial Statements included elsewhere in this report.
- The issuance of stock options in connection with our "cash compensation
for stock options" program. See Note 13 -- Subsequent Events in the Notes
to Condensed Consolidated Financial Statements included elsewhere in this
report.
- The issuance of common stock to effect business combinations should we
enter into such transactions.
- The issuance of common stock or warrants to effect joint marketing, joint
development or other similar arrangements should we enter into such
arrangements.
- Assumed or actual conversions of debt into common stock with respect to
our convertible debt.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital
expenditure requirements primarily through cash flows provided from operations,
long-term borrowings and sales of equity securities. Our liquidity and financial
position at September 30, 2001 showed a 32.3% decrease in working capital in the
first nine months of 2001. Working capital was $526.0 million as of September
30, 2001, compared to $776.7 million as of December 31, 2000. The decrease in
working capital was primarily the result of a $57.9 million decrease in cash and
short-term investments, a $115.7 million decrease in net accounts receivable and
a $101.7 million increase in accounts payable and other accrued expenses partly
offset by a $20.6 million increase in deferred income taxes, prepaids and other
current assets.
During the nine months ended September 30, 2001, net cash provided by
operating activities decreased $124.4 million, net cash used in investing
activities increased $64.9 million and net cash provided by financing activities
decreased $46.4 million, compared to totals for the same period in 2000. Cash
and cash equivalents were $553.8 million at September 30, 2001, a decrease of
$185.4 million compared to balances at December 31, 2000. The decrease in cash
and cash equivalents was primarily the result of $211.3 million in cash used in
investing activities offset by $26.1 million in cash provided by financing
activities.
The most significant adjustments to reconcile net loss to net cash provided
by operations in the first nine months of 2001 were depreciation and
amortization of $2.4 billion, impairment of intangibles of $4.7 billion,
deferred income taxes and disqualifying dispositions of $276.5 million, tax
benefits from stock option exercises of $48.1 million, losses on equity
investments of $69.1 million, bad debt expense of $66.0 million, the net
decrease in accounts receivable of $53.8 million and the net increase in accrued
liabilities of $67.0 million.
Significant uses of cash for investing activities in the first nine months
of 2001 were purchases of premises and equipment of $53.7 million, cash fundings
in connection with a line of credit arrangement with RightWorks prior to our
acquisition totaling $28.6 million, and net purchases of debt securities and
equity investments of $124.6 million.
The $26.1 million in cash provided by financing activities in the first
nine months of 2001 was from $50.8 million in proceeds from the sale of common
stock to employees and exercises of stock options, offset by $24.7 million paid
on a note acquired in the acquisition of TSC.
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Accounts receivable, net of allowance for doubtful accounts, decreased
38.8% for the first nine months of 2001. Days sales outstanding (DSO's) in
receivables increased to 87 days as of September 30, 2001 from 83 days as of
June 30, 2001, 77 days as of March 31, 2001 and 73 days as of December 31, 2000.
The increase in the DSO total for the first nine months of 2001 primarily
resulted from extended collection cycles and our providing customers more
favorable payment terms. There is no assurance that DSO performance will
improve, or even remain at this level.
In August 2001, we obtained a one-year, $20.0 million letter of credit line
to replace two, $15.0 million, one-year revolving lines of credit that expired.
Letters of credit issued in connection with this line will be secured by debt
securities held in our brokerage account maintained by the lender. As of
September 30, 2001, $3.5 million in letters of credit were outstanding under
this line.
On December 10, 1999, we issued an aggregate principal amount of $350.0
million in 5.25% convertible subordinated notes due in 2006. As of September 30,
2001, none of the notes have been converted to common stock. The notes are
convertible at the option of the holder into shares of our common stock at a
conversion price of $38.00 per share at any time prior to maturity. On or after
December 20, 2002, we have the option to redeem, in cash, all or a portion of
the notes that have not been previously converted.
In connection with our acquisition of TSC on March 23, 2001, we issued a
convertible promissory note for $60.9 million with a 7.5% coupon payable in cash
annually. The note matures on September 23, 2003. After March 23, 2002 and prior
to maturity, we may convert the note into shares of our common stock. The holder
of the note may convert the note into shares of our common stock at any time
prior to maturity provided the average of the last sale prices of our common
stock as reported on the Nasdaq National Market for the three consecutive
trading days immediately prior to the conversion date exceeds $60.00 per share.
Details of the note are presented in Note 2 -- Business Combinations and Asset
Acquisitions in the Notes to Condensed Consolidated Financial Statements
included elsewhere in this report.
In the future, we may pursue acquisition of businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. Any material acquisition or joint venture could result in a
decrease to our working capital depending on the nature, timing and amount of
consideration to be paid.
We expect future liquidity will be enhanced to the extent that we are able
to realize the cash benefit from utilization of our net operating loss
carryforwards against future tax liabilities. As of September 30, 2001, we had
approximately $1.2 billion in net operating loss carryforwards, which represent
up to approximately $442.4 million in future tax benefits. The utilization of
the U.S. net operating loss carryforwards is subject to limitations and various
expiration dates in years 2006 through 2021. Foreign net operating losses have
no expiration date.
We believe that existing cash and cash equivalent balances, short-term
investment balances and our anticipated cash flows from operations will satisfy
our working capital and capital expenditure requirements for the foreseeable
future. However, any material acquisitions of complementary businesses, products
or technologies or joint venture arrangements could require us to obtain
additional equity or debt financing.
SENSITIVITY TO MARKET RISKS
Foreign Currency Risk. Revenues originating outside of the United States
totaled 31.8% and 35.9% of total revenues during the three and nine months ended
September 30, 2001. Since we conduct business on a global basis in various
foreign currencies, we are exposed to adverse movements in foreign currency
exchange rates. In January 2001, we established a foreign currency hedging
program utilizing foreign currency forward exchange contracts to hedge various
nonfunctional currency exposures. The objective of this program is to reduce the
effect of changes in foreign currency exchange rates on our results of
operations. Furthermore, our goal is to offset foreign currency transaction
gains and losses recorded for accounting purposes with gains and losses realized
on the forward contracts. Our hedging activities cannot completely protect us
from the risk of foreign currency losses as our currency exposures are
constantly changing and not all of these exposures are hedged. Details of our
foreign currency risk management program are presented in Note 8 -- Foreign
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Currency Risk Management in the Notes to Condensed Consolidated Financial
Statements included elsewhere in this report.
Interest Rate Risk. Our investments are subject to interest rate risk.
Interest rate risk is the risk that our financial condition and results of
operations could be adversely affected due to movements in interest rates. We
invest our cash in a variety of interest-earning financial instruments,
including bank time deposits, money market funds and taxable and tax-exempt
variable rate and fixed rate obligations of corporations, municipalities and
local, state and national governmental entities and agencies. These investments
are denominated in U.S. Dollars. Cash balances in foreign currencies overseas
are operating balances and are invested in short-term time deposits of the local
operating bank.
Due to the demand nature of our money market funds and the short-term
nature of our time deposits and debt securities portfolio, these assets are
particularly sensitive to changes in interest rates. As of September 30, 2001,
59.2% of our debt securities and time deposits had original or remaining
maturities of three months or less, while 39.8% had original or remaining
maturities between three months and one year. If these short-term assets are
reinvested in a declining interest rate environment, we would experience an
immediate negative impact on other income. The opposite holds true in a rising
interest rate environment. The Federal Reserve Board influences the general
market rates of interest. Since December 31, 2000, the Federal Reserve Board has
decreased the discount rate by 450 basis points, which has led to significant
declines in short-term market interest rates. As a result, the weighted-average
yield on debt securities held as of September 30, 2001 was 4.74% compared to
5.02%, 5.40% and 6.8% for debt securities held as of June 30, 2001, March 31,
2001 and December 31, 2000, respectively. The decrease in the weighted-average
yield on these investments resulted as maturing investments were reinvested at
lower market yields as a result of the Federal Reserve Board's recent actions.
Market Price Risk. In addition to investments in debt securities, we
maintain minority equity investments in various privately held and publicly
traded companies for business and strategic purposes. Our investments in
publicly traded companies are subject to market price volatility. As a result of
market price volatility, we experienced a $4.6 million net after-tax unrealized
gain during the nine months ended September 30, 2001 on these investments. We
also wrote-down, by $35.5 million, the carrying basis of certain equity
investments in publicly traded companies as a result of significant declines in
the fair value of these investments. Our ability to sell certain equity
positions is restricted under securities laws or pursuant to contractual
agreements. We may implement hedging strategies using put and call options to
fix our gains and limit our losses in certain equity positions until such time
as the investments can be sold. During the first quarter of 2001, we hedged an
unrealized gain position in one of our equity holdings using a combination of
put and call options. As of September 30, 2001, the fair value of this
investment had declined $4.8 million from the date we placed the hedge and we
adjusted its carrying basis accordingly. The increase in the fair value of the
hedging instruments, which totaled $3.8 million at September 30, 2001, was
recorded as an asset. The fair value of our investments in publicly traded
companies totaled $11.5 million at September 30, 2001. The fair value of these
investments would be $10.3 million assuming a 10% decrease in each stock's
price.
We have invested in numerous privately held companies, many of which can
still be considered in the start-up or development stages. These investments are
inherently risky as the market for technologies or products they have under
development are typically in the early stages and may never materialize.
Further, market conditions for these types of investments have significantly
deteriorated since December 31, 2000. As of September 30, 2001, our investments
in privately held companies have been completely written-off. During the nine
months ended September 30, 2001, we wrote-down the carrying basis of equity
investments in privately held companies by $33.0 million, $20.3 million of which
occurred in the third quarter. The write-downs were the result of significant
declines in the expected realizable amounts of these investments.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties
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that we do not presently know or that we currently deem immaterial may also
impair our business operations. This report is qualified in its entirety by
these risk factors.
If any of the following risks actually occur, they could materially
adversely affect our business, financial condition or results of operations. In
that case, the trading price of our common stock could decline.
RISKS RELATED TO OUR BUSINESS
OUR FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER OR WE MAY
FAIL TO MEET EXPECTATIONS, WHICH WOULD NEGATIVELY IMPACT THE PRICE OF OUR STOCK.
Our operating results have varied significantly from quarter to quarter in
the past, and we expect our operating results to continue to vary from quarter
to quarter in the future, due to a variety of factors, many of which are outside
of our control.
Although our revenues are subject to fluctuation, significant portions of
our expenses are not variable in the short term, and we cannot reduce them
quickly to respond to decreases in revenues. Therefore, if revenues are below
expectations, this shortfall is likely to adversely and disproportionately
affect our operating results. Accordingly, we may not attain positive operating
margins in future quarters. Any of these factors could cause our operating
results to be below the expectations of securities analysts and investors, which
likely would negatively affect the price of our common stock.
THE IMPACT OF GLOBAL ECONOMIC CONDITIONS ON OUR CUSTOMERS MAY CAUSE US TO FAIL
TO MEET EXPECTATIONS, WHICH WOULD NEGATIVELY IMPACT THE PRICE OF OUR STOCK.
Our operating results can vary significantly based upon the impact of
global economic conditions on our customers. More specifically, the
macroeconomic environment has continued to decline, exacerbated by uncertainty
surrounding recent world events, and is more uncertain than in recent periods
and has the potential to materially and adversely affect us. The revenue growth
and operating results of our business depends on the overall demand for computer
software and services, particularly in the areas in which we compete. Because
our sales are primarily to major corporate customers whose businesses fluctuate
with general economic and business conditions, a softening of demand for
computer software caused by a weakening economy may result in decreased revenues
and lower growth rates. We may be especially prone to this as a result of the
relatively large license transactions we have historically relied upon.
Customers may defer or reconsider purchasing products if they continue to
experience a lack of growth in their business or if the general economy fails to
significantly improve.
HISTORICALLY, A SMALL NUMBER OF INDIVIDUAL LICENSE SALES HAVE BEEN SIGNIFICANT
IN EACH QUARTERLY PERIOD. THEREFORE, OUR OPERATING RESULTS FOR A GIVEN PERIOD
COULD SUFFER SERIOUS HARM IF WE FAIL TO CLOSE ONE OR MORE LARGE SALES EXPECTED
FOR THAT PERIOD.
We generally derive a significant portion of revenues in each quarter from
a small number of relatively large license sales with, in some cases, long and
intensive sales cycles. For example, three license sales recognized in the third
quarter of 2001, five license sales recognized in the second quarter of 2001,
ten license sales recognized in the first quarter of 2001, 15 license sales
recognized in the fourth quarter of 2000 and six license sales recognized in the
third quarter of 2000 each accounted for at least $5.0 million in revenues
during the quarter. In addition, our expectations of financial results for a
particular quarter frequently assume the successful closing of multiple
substantial license sales that we have targeted to close in that period.
Moreover, due to customer purchasing patterns, we typically realize a
significant portion of our software license revenues in the last few weeks of a
quarter. As a result, we are subject to significant variations in license
revenues and results of operations if we incur any delays in customer purchases.
If in any future period we fail to close one or more substantial license sales
that we have targeted to close in that period, this failure could seriously harm
our operating results for that period.
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IMPLEMENTATION OF OUR PRODUCTS IS COMPLEX, TIME-CONSUMING AND EXPENSIVE AND
CUSTOMERS MAY BE UNABLE TO IMPLEMENT OUR PRODUCTS SUCCESSFULLY OR OTHERWISE
ACHIEVE THE BENEFITS ATTRIBUTABLE TO OUR PRODUCTS.
Our products must integrate with the many existing computer systems and
software programs of our customers. This can be complex, time-consuming and
expensive, and may cause delays in the deployment of our products. Our customers
may be unable to implement our products successfully or otherwise achieve the
benefits attributable to our products. Delayed or ineffective implementation of
our software and services may limit our ability to expand our revenues and may
result in customer dissatisfaction, harm to our reputation and cause partial
non-payment of fees.
WE MAY NOT REMAIN COMPETITIVE, AND INCREASED COMPETITION COULD SERIOUSLY HARM
OUR BUSINESS.
Our competitors offer a wide variety of e-business solutions including
enterprise software. Relative to us, our competitors may have one or more of the
following advantages:
- Longer operating history.
- Greater financial, technical, marketing, sales and other resources.
- Superior product functionality in specific areas.
- Greater name recognition.
- A broader range of products to offer.
- A larger installed base of customers.
Current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to enhance
their products, which may result in increased competition. In addition, we
expect to experience increasing price competition as we compete for market
share, and we may not be able to compete successfully with our existing or new
competitors. Any of these conditions could cause substantial harm to our
business, operating results and financial condition.
OUR RESTRUCTURING AND OTHER STRATEGIC INITIATIVES MAY NOT ACHIEVE OUR DESIRED
RESULTS AND COULD RESULT IN BUSINESS DISTRACTIONS THAT COULD HARM OUR BUSINESS.
We implemented a restructuring plan in the second quarter with additional
actions taking place in the third and fourth quarters of 2001. The objective of
our restructuring plan is to reduce our cost structure and drive more
efficiencies. We also implemented other strategic initiatives designed to
strengthen our operations. These plans involve, among other things, reductions
in our workforce and facilities, improved alignment of our organization around
our business objectives, realignment of our sales force and changes in our sales
management, increasing the proportion of our development workforce in India,
increasing demand generation programs and creating a product that is packaged
for high-volume sales. The workforce reductions could temporarily impact our
remaining employees, including those directly responsible for sales, which may
affect our future revenues. Further, the failure to retain and effectively
manage remaining employees could increase our costs, hurt our development and
sales efforts and impact the quality of our customer service. Additionally,
these changes might affect our ability to close revenue transactions with our
customers and prospects. Failure to achieve the desired results of our strategic
initiatives could harm our business, results of operations and financial
condition.
OUR OBJECTIVE OF INCREASING OUR RECURRING REVENUE STREAMS BY SELLING SERVICES
AND CONTENT TO MARKETPLACES AND THEIR PARTICIPANTS IS UNPROVEN AND MAY BE
UNSUCCESSFUL.
As part of our business strategy, we are offering services and content to
trading communities and participants in digital marketplaces. We are currently
providing only a limited portion of the total solutions required to fully
operate digital trading communities to only a relatively small segment of this
market compared to the potential market for these digital trading communities.
We cannot be certain that these
32
trading communities will be operated effectively, that enterprises will join and
remain in these trading communities, or that we will develop all solutions
required to operate digital trading communities. If this business strategy is
flawed, or if we are unable to execute it effectively, our business, operating
results and financial condition could be substantially harmed.
WE DEPEND ON OUR STRATEGIC PARTNERS AND OTHER THIRD PARTIES FOR SALES AND
IMPLEMENTATION OF OUR PRODUCTS. IF WE FAIL TO DERIVE BENEFITS FROM OUR EXISTING
AND FUTURE STRATEGIC RELATIONSHIPS, OUR BUSINESS WILL SUFFER.
From time to time, we have collaborated with other companies, including IBM
and PricewaterhouseCoopers, in areas such as marketing, distribution and
implementation. Maintaining these and other relationships is a meaningful part
of our business strategy. However, some of our current and potential strategic
partners are either actual or potential competitors, which may impair the
viability of these relationships. In addition, some of our relationships have
failed to meet expectations and may fail to meet expectations in the future. A
failure by us to maintain existing strategic relationships or enter into
successful new strategic relationships in the future could seriously harm our
business, operating results and financial condition.
CONTINUED DECREASES IN DEMAND FOR OUR ENTERPRISE PRODUCTS AND SERVICES COULD
SIGNIFICANTLY REDUCE OUR REVENUES.
We derive a substantial portion of our revenues from licenses of our
enterprise products and related services. Our enterprise products principally
include solutions for supply chain management, supplier relationship management,
customer relationship management and other planning products. We expect license
revenues and maintenance and consulting contracts related to these products to
continue to account for a substantial portion of our revenues for the
foreseeable future. We have recently experienced a decrease in the demand for
our enterprise products and related services primarily due to the weakening
macroeconomic environment, which has led to a decline in our revenues. Other
factors such as competition and technological change could also impact demand
for, or market acceptance of, these applications. Any further decrease in demand
or changes in market acceptance of our enterprise offerings could substantially
harm our business, operating results and financial condition.
WE ARE INVESTING SIGNIFICANT RESOURCES IN DEVELOPING AND MARKETING OUR SOFTWARE
SOLUTIONS. THE MARKET FOR THESE SOLUTIONS IS NEW AND EVOLVING, AND IF THIS
MARKET DOES NOT DEVELOP AS WE ANTICIPATE, OR IF WE ARE UNABLE TO DEVELOP
ACCEPTABLE SOLUTIONS, SERIOUS HARM WOULD RESULT TO OUR BUSINESS.
We are investing significant resources in further developing and marketing
enhanced products and services to facilitate conducting business on-line, within
an enterprise and among many enterprises, or marketplaces. These include, among
other things, transaction management solutions related to distributed order
management and inventory visibility. The demand for, and market acceptance of,
these products and services are subject to a high level of uncertainty,
especially where development of our products or services requires a large
capital commitment or other significant commitment of resources. Adoption of
e-business software solutions, particularly by those individuals and enterprises
that have historically relied upon traditional means of commerce and
communication, will require a broad acceptance of new and substantially
different methods of conducting business and exchanging information. These
products and services are often complex and involve a new approach, dynamic
value chain management, to the conduct of business. As a result, intensive
marketing and sales efforts may be necessary to educate prospective customers
regarding the uses and benefits of these products and services in order to
generate demand. The market for this broader functionality may not develop,
competitors may develop superior products and services, or we may not develop
acceptable solutions to address this functionality. Any one of these events
could seriously harm our business, operating results and financial condition.
33
IF WE PUBLISH INACCURATE CATALOG CONTENT DATA, OUR CONTENT SALES COULD SUFFER.
The accurate publication of catalog content is critical to our customers'
businesses. Our suite of products offers content management tools that help
suppliers manage the collection and publication of catalog content. Any defects
or errors in these tools or the failure of these tools to accurately publish
catalog content could deter businesses from participating in marketplaces,
damage our business reputation and harm our ability to win new customers. In
addition, from time to time some of our customers may submit inaccurate pricing
or other inaccurate catalog information. Even though such inaccuracies are not
caused by our work and are not within our control, such inaccuracies could deter
current and potential customers from using our products and could seriously harm
our business, operating results and financial condition.
BECAUSE OUR PRODUCTS COLLECT AND ANALYZE STORED CUSTOMER INFORMATION, CONCERNS
THAT OUR PRODUCTS DO NOT ADEQUATELY PROTECT THE PRIVACY OF CONSUMERS COULD
INHIBIT SALES OF OUR PRODUCTS.
One of the features of our customer management software applications is the
ability to develop and maintain profiles of consumers for use by businesses.
Typically, these products capture profile information when consumers, business
customers and employees visit an Internet web-site and volunteer information in
response to survey questions concerning their backgrounds, interests and
preferences. Our products augment these profiles over time by collecting usage
data. Although our customer management products are designed to operate with
applications that protect user privacy, privacy concerns nevertheless may cause
visitors to resist providing the personal data necessary to support this
profiling capability. Any inability to adequately address consumers' privacy
concerns could seriously harm our business, financial condition and operating
results.
BECAUSE OUR PRODUCTS REQUIRE THE TRANSFER OF INFORMATION OVER THE INTERNET,
SERIOUS HARM TO OUR BUSINESS COULD RESULT IF OUR ENCRYPTION TECHNOLOGY FAILS TO
ENSURE THE SECURITY OF OUR CUSTOMERS' ONLINE TRANSACTIONS.
The secure exchange of confidential information over public networks is a
significant concern of consumers engaging in on-line transactions and
interaction. Our customer management software applications use encryption
technology to provide the security necessary to effect the secure exchange of
valuable and confidential information. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments could
result in a compromise or breach of the algorithms that these applications use
to protect customer transaction data. If any compromise or breach were to occur,
it could seriously harm our business, financial condition and operating results.
WE MAY NOT SUCCESSFULLY INTEGRATE OR REALIZE THE INTENDED BENEFITS OF RECENT
ACQUISITIONS, AND WE MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES
THAT ARE NOT SUCCESSFUL.
In the future, we plan to acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. Management's negotiations of potential acquisitions or
joint ventures and management's integration of acquired businesses, products or
technologies could divert their time and resources. Future acquisitions could
cause us to issue equity securities that would dilute your ownership of us,
incur debt or contingent liabilities, amortize recognized intangibles, or write
off in-process research and development and other acquisition-related expenses
that could seriously harm our financial condition and operating results.
Further, we may not be able to properly integrate acquired businesses, products
or technology with our existing operations, train, retain and motivate personnel
from the acquired business, or combine potentially different corporate cultures.
For example, we have integrated Trade Service Corporation and ec-Content, Inc.,
which acquisitions closed in March 2001, and we are integrating RightWorks
Corporation, which acquisition closed in the third quarter of 2001. If we are
unable to fully integrate an acquired business, product or technology or train,
retain and motivate personnel from the acquired business, we may not receive the
intended benefits of that acquisition, which could seriously harm our business,
operating results and financial condition.
34
THE LOSS OF ANY OF OUR KEY PERSONNEL OR OUR FAILURE TO ATTRACT ADDITIONAL
PERSONNEL COULD SERIOUSLY HARM OUR COMPANY.
We rely upon the continued service of a relatively small number of key
technical and senior management personnel. Our future success depends on
retaining our key employees and our continuing ability to attract, train and
retain other highly qualified technical and managerial personnel. Relatively few
of our key technical or senior management personnel are bound by employment
agreements. As a result, our employees could resign with little or no prior
notice. We may not be able to attract, assimilate or retain other highly
qualified technical and managerial personnel in the future. Our loss of any of
our key technical and senior management personnel or our inability to attract,
train and retain additional qualified personnel could seriously harm our
business, operating results and financial condition.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.
We rely primarily on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and contractual provisions to protect our
proprietary rights. However, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult, and we cannot be certain
that the steps we have taken will prevent misappropriation of our technology.
This is particularly true in foreign countries where the laws may not protect
proprietary rights to the same extent as the laws of the United States and may
not provide us with an effective remedy against piracy.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. As a result, we may be subject to claims
of intellectual property infringement. Although we are not aware that any of our
products infringe upon the proprietary rights of third parties, third parties
may claim infringement by us with respect to current or future products. Any
infringement claims, with or without merit, could be time-consuming, result in
costly litigation or damages, cause product shipment delays or the loss or
deferral of sales, or require us to enter into royalty or licensing agreements.
If we enter into royalty or licensing agreements in settlement of any litigation
or claims, these agreements may not be on terms acceptable to us. Unfavorable
royalty and licensing agreements could seriously harm our business, operating
results and financial condition.
WE CURRENTLY FACE MATERIAL LITIGATION AND ARE MORE LIKELY TO CONTEND WITH
ADDITIONAL LITIGATION IN THE FUTURE DUE TO THE VOLATILITY OF OUR STOCK PRICE.
We face litigation that could have a material adverse effect on our
business, financial condition and results of operations. We and certain of our
directors and executive officers are named as defendants in several private
securities class action lawsuits relating to our alleged failure to disclose
material information regarding customer implementations. While we vigorously
dispute these allegations, it is possible that we may be required to pay
substantial damages or settlement costs which could have a material adverse
effect on our financial condition or results of operation. Regardless of the
outcome of these matters, it is likely that we will incur substantial defense
costs and such actions may cause a diversion of management time and attention.
Due to the volatility of the stock market and particularly the stock prices of
technology companies, it is likely that we will face additional class action
lawsuits in the future.
35
BECAUSE OF OUR SIGNIFICANT INTERNATIONAL OPERATIONS, WE FACE RISKS ASSOCIATED
WITH INTERNATIONAL SALES AND OPERATIONS THAT COULD HARM OUR COMPANY.
Our international operations are subject to risks inherent in international
business activities. In addition, we may expand our international operations in
the future, which would increase our exposure to these risks. The risks we face
internationally include:
- Difficulties and costs of staffing and managing geographically disparate
operations.
- Longer accounts receivable payment cycles in certain countries.
- Compliance with a variety of foreign laws and regulations.
- Overlap of different tax structures.
- Meeting import and export licensing requirements.
- Trade restrictions.
- Changes in tariff rates.
- Changes in general economic conditions in international markets.
CHANGES IN THE VALUE OF THE U.S. DOLLAR, AS COMPARED TO THE CURRENCIES OF
FOREIGN COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR OPERATING RESULTS.
To date, our international revenues have been denominated primarily in U.S.
dollars. However, the majority of our international expenses, including the
wages of approximately 1,750 non-U.S. employees, and an increasing percentage of
international revenues, have been denominated in currencies other than the U.S.
dollar. Therefore, changes in the value of the U.S. dollar as compared to these
other currencies may adversely affect our operating results. As our
international operations expand, we expect to use an increasing number of
foreign currencies, causing our exposure to currency exchange rate fluctuations
to increase. We have implemented limited hedging programs to mitigate our
exposure to currency fluctuations affecting international accounts receivable,
cash balances and intercompany accounts, but we do not hedge our exposure to
currency fluctuations affecting international expenses and other commitments.
For the foregoing reasons, currency exchange rate fluctuations have caused, and
likely will continue to cause, variability in our cost to settle foreign
currency denominated liabilities, which could seriously harm our future
business, results of operations and financial condition.
OUR SOFTWARE IS COMPLEX AND MAY CONTAIN UNDETECTED ERRORS.
Our software programs are complex and may contain undetected errors or
"bugs." Although we conduct extensive testing, we may not discover bugs until
our customers install and use a given product or until the volume of services
that a product provides increases. On occasion, we have experienced delays in
the scheduled introduction of new and enhanced products because of bugs.
Undetected errors could result in loss of customers or reputation, adverse
publicity, loss of revenues, delay in market acceptance, diversion of
development resources, increased insurance costs or claims against us by
customers, any of which could seriously harm our business, operating results and
financial condition.
WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD SERIOUSLY HARM OUR
BUSINESS.
Our software products generally are used by our customers in mission
critical applications where component failures could cause significant damages.
To mitigate this exposure, our license agreements typically seek to limit our
exposure to product liability claims from our customers. However, these contract
provisions may not preclude all potential claims. Additionally, our general
liability insurance may be inadequate to protect us from all liability that we
may face. We have not experienced any product liability claims to date. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any claim, whether or not
successful, could harm our reputation and business, operating results and
financial condition.
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OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE SIGNIFICANT INFLUENCE OVER STOCKHOLDER
VOTES.
As of October 31, 2001, our executive officers and directors together
beneficially owned approximately 30.8% of the total voting power of our company.
Accordingly, these stockholders have significant influence in determining the
composition of our Board of Directors and other significant matters presented to
a vote of stockholders, including amendments to our certificate of
incorporation, a substantial sale of assets or other major corporate transaction
or a non-negotiated takeover attempt. Such concentration of ownership may
discourage a potential acquirer from making an offer to buy our company that
other stockholders might find favorable which, in turn, could adversely affect
the market price of our common stock.
OUR CHARTER AND BYLAWS HAVE ANTI-TAKEOVER PROVISIONS.
Provisions of our Certificate of Incorporation and our Bylaws as well as
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law, which
restricts certain business combinations with interested stockholders. The
combination of these provisions may inhibit a non-negotiated merger or other
business combination.
OUR STOCK PRICE HISTORICALLY HAS BEEN VOLATILE, WHICH MAY MAKE IT MORE DIFFICULT
FOR YOU TO RESELL COMMON STOCK WHEN YOU WANT AT PRICES YOU FIND ATTRACTIVE.
The market price of our common stock has been highly volatile in the past,
and may continue to be volatile in the future. For example, since January 1,
2001, the market price of our common stock on the Nasdaq National Market has
fluctuated between $2.98 and $61.00 per share. The following factors may
significantly affect the market price of our common stock:
- Quarterly variations in our results of operations.
- Announcement of new products, product enhancements, joint ventures and
other alliances by our competitors or us.
- Technological innovations by our competitors or us.
- General market conditions or market conditions specific to particular
industries.
- Perceptions in the marketplace of performance problems involving our
products and services.
In particular, the stock prices of many companies in the technology and
emerging growth sectors have fluctuated widely, often due to events unrelated to
their operating performance. These fluctuations may harm the market price of our
common stock.
RISKS RELATED TO OUR INDUSTRY
THE CUSTOMERS IN THE MARKETS IN WHICH WE COMPETE DEMAND RAPID TECHNOLOGICAL
CHANGE, INCLUDING THE EXPECTATION THAT OUR EXISTING OFFERINGS WILL CONTINUE TO
PERFORM MORE EFFICIENTLY AND THAT WE WILL CONTINUE TO INTRODUCE NEW PRODUCT
OFFERINGS. IF WE DO NOT RESPOND TO THE TECHNOLOGICAL ADVANCES REQUIRED BY THE
MARKETPLACE, WE COULD SERIOUSLY HARM OUR BUSINESS.
Enterprises are increasing their focus on decision-support solutions for
e-business challenges. As a result, they are requiring their application
software vendors to provide greater levels of functionality and broader product
offerings. Moreover, competitors continue to make rapid technological advances
in computer hardware and software technology and frequently introduce new
products, services and enhancements. We must continue to enhance our current
product line and develop and introduce new products and services that keep pace
with the technological developments of our competitors. We must also satisfy
increasingly sophisticated customer requirements. If we cannot successfully
respond to the technological advances of others, or if our new products or
product enhancements and services do not achieve market acceptance, these events
could negatively impact our business, operating results and financial condition.
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OUR OFFERINGS REQUIRE THE USE OF THE INTERNET TO TAKE FULL ADVANTAGE OF THE
FUNCTIONALITY THAT THEY PROVIDE, AND SO, IF USE OF THE INTERNET FOR COMMERCE AND
COMMUNICATION DOES NOT INCREASE AS WE ANTICIPATE, OUR BUSINESS WILL SUFFER.
We are offering new and enhanced products and services, which depend on
increased acceptance and use of the Internet as a medium for commerce and
communication. Rapid growth in the use of the Internet is a recent phenomenon.
As a result, acceptance and use may not continue to develop at historical rates,
and a sufficiently broad base of business customers may not adopt or continue to
use the Internet as a medium of commerce. Demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty, and there exists a limited number of proven services
and products.
RELEASES OF AND PROBLEMS WITH NEW PRODUCTS MAY CAUSE PURCHASING DELAYS, WHICH
WOULD HARM OUR REVENUES.
Our practice and the practice in the industry is to periodically develop
and release new products and enhancements. As a result, customers may delay
their purchasing decisions in anticipation of our new or enhanced products, or
products of competitors. Delays in customer purchasing decisions could seriously
harm our business and operating results. Moreover, significant delays in the
general availability of new releases, significant problems in the installation
or implementation of new releases, or customer dissatisfaction with new releases
could seriously harm our business, operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is included in the section captioned "Sensitivity to
Market Risks," included in Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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PART II
ITEM 1. LEGAL PROCEEDINGS
An employee of a company we acquired in 1998 is currently disputing the
cancellation of stock options received at the time of the acquisition. Vesting
of the options was dependent upon continued employment; however, the employment
was terminated in 2000. We maintain the former employee was not entitled to
unvested stock options.
A former executive officer has made certain claims against us related to
his termination and his ability to exercise and sell certain stock options. Our
position is that the former executive officer was terminated for cause and
therefore we intend to vigorously defend against this lawsuit.
Since March 2, 2001, a number of purported class action complaints have
been filed in the United States District Court for the Northern District of
Texas (Dallas Division) against us and certain of our officers and directors.
The cases have been consolidated, and on August 3, 2001, plaintiffs filed a
consolidated amended complaint. The consolidated amended complaint alleges that
we and certain of our officers violated the federal securities laws,
specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by
making purportedly false and misleading statements concerning the
characteristics and implementation of certain of our software products. The
consolidated amended complaint seeks unspecified damages on behalf of a
purported class of purchasers of our common stock during the period between May
4, 2000 and February 26, 2001. We intend to vigorously defend against this
lawsuit and we filed a motion to dismiss the consolidated amended complaint in
September 2001.
On April 24, 2001, a shareholder derivative lawsuit was filed against us
and certain of our officers and directors in Dallas County, Texas. The suit
claims that certain of our officers and directors breached their fiduciary
duties to us and our stockholders by: (i) selling shares of our common stock
while in possession of material adverse non-public information regarding our
business and prospects, and (ii) disseminating inaccurate information regarding
our business and prospects to the market and/or failing to correct such
inaccurate information. This suit has since been removed to the United States
District Court for the Northern District of Texas (Dallas Division). We intend
to vigorously defend against this lawsuit.
We are subject to various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on our business, financial condition or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the third quarter of 2001, we issued an aggregate of 139,000 shares
of our common stock to employees pursuant to exercises of stock options that
were granted prior to April 26, 1996 with exercise prices ranging from $0.0063
to $1.51 per share. These issuances were deemed exempt from registration under
Section 5 of the Securities Act of 1933 in reliance upon Rule 701 thereunder and
appropriate legends were affixed to the share certificates issued in each such
transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On October 25, 2001, we announced the resignation of Kenneth Lay from our
Board of Directors. Mr. Lay had recently reassumed the role of chief executive
officer at Enron, necessitating that he limit his outside commitments.
39
On November 12, 2001, we announced executive-level staff changes as a part
of our corporate reorganization initiatives. Dr. Pallab Chatterjee will now head
our research and development organization as executive vice president of
Worldwide Development, a role previously shared with John West, who joined us in
connection with our acquisition of RightWorks. Mr. West will remain with us as a
part-time consultant. Dr. Romesh Wadhwani, vice chairman, has reduced his
full-time involvement with us to pursue outside investments and charitable
activities. Dr. Wadhwani will remain vice chairman of our Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended September 30, 2001, we filed the following
reports on Form 8-K.
- Report on Form 8-K (Item 5) on July 3, 2001, which contained a press
release announcing preliminary financial results for the quarter ended
June 30, 2001.
- Report on Form 8-K (Item 5) on July 19, 2001, which contained a press
release announcing financial results for the quarter ended June 30,
2001.
- Report on Form 8-K (Item 5) on August 23, 2001, which contained a
press release announcing the completion of the acquisition of
RightWorks Corporation on August 22, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned, hereunto duly authorized.
i2 TECHNOLOGIES, INC.
November 14, 2001 By: /s/ WILLIAM M. BEECHER
(Date) ----------------------------------------
William M. Beecher
Executive Vice President and
Chief Financial Officer
(Principal financial officer)
November 14, 2001 /s/ DAVID C. BECKER
(Date) ----------------------------------------
David C. Becker
Senior Vice President -- Finance & Accounting
(Principal accounting officer)
41